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Sirius XM 2009 Debt Is a Non Issue for Investors

by: Brandon Matthews August 12, 2008 | about stocks: SIRI    

Brandon Matthews

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A lot of noise is being made these days by people regarding certain convertible debt that SIRIUS XM (SIRI) has coming due in 2009.  I have no problem admitting that I for one, am one of those unsophisticated investors we’ve heard about lately. The truth is this whole convertible arbitrage thing hit me like a sucker punch to the side of the head, and I’m still trying to find out what the heck just happened!

Seems like a lot of people are becoming more sophisticated these days as they try to learn all they can about convertible arbitrage. I was reading over Sirius’ 10Q filed Monday. After hearing Mel on Cramer referring to converts coming due in 2009, I decided to look into it a bit deeper. I have seen message board posters claiming billions had to be repaid in 2009.

I did find 2 converts coming due in 2009. The first one is a total of $300,000.00 due in February 2009. On the grand scale this would seem like minutia. Also listed was $1.7 million in “aggregate principal amount of 8-3/4% Convertible Subordinated Notes due 2009″. These are not due until September. That’s a total of 2 million dollars. Not for nothing, but refinancing those notes should not be a problem. In fact they should just be paid off.

Not finding anything of real importance in Sirius’ filings, I headed over to the former XMSR filings. This is where the debt issue comes into play. XM has $400.0 million of 1.75% Convertible Senior Notes maturing. These were announced at the end on December of 2002. I have been unable to ascertain whether they are due in January of 2009 or December of 2009. For argument's sake, let us assume that they are due this January.

Also of interest is 187.5 million due on a revolving credit facility in 2009, again I was unable to find in the mountains of press releases any firm due date. This is probably the bank issue Mel made reference to in his interview. So now we’ve gone from billions due, to just under 590 million that does not have to be paid off, but refinanced.

Credit markets exist for a reason. They add liquidity and of themselves there is nothing wrong with using them….especially when the terms are beneficial to companies. SIRIUS XM now has an annual projected revenue stream of 2.4 billion dollars. When these deals were originally inked there was no guarantee that Satellite Radio would even be a viable business.

The reason I am bringing this up is because a lot of boiler room message board groupies are using the word “converts” as a scare tactic. These convertibles were issued many years ago, and shorted against back in 2002 -2003. The shares were already shorted, and as Jim Cramer pointed out Monday, it's customary practice.

SIRIUS XM should not have a problem refinancing any of this debt. So what does it mean to shareholders? It should mean nothing! That’s right, absolutely NOTHING! As the old converts are paid off, the existing short positions are covered, and the shares returned. The replacing converts (assuming this is the debt instrument chosen at that time) short against the new. The net effect is a zero-sum-game. The new shares used a few weeks ago for arbitrage purposes was for new debt.  Refinancing these old convertibles, as Martha Stewart would say, is a good thing, and shouldn’t result in any dilution of shares. In the end, it will not matter if 600 million needs refinancing or 6 billion.

Position: Long SIRI

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This article has 37 comments:

  •  
    Aug 12 08:27 AM
    Thanks for the clarification and update.
    Reply
  •  
    Aug 12 08:53 AM
    Mr Matthews: You have misplaced an important zero. SIRI has $300 MILLION not Thousand of 2 1/2% Converts due in Feb 2009, convertible @ $4.41. If the stock doesn't achieve this price the debt will have to be paid in cash six months from now.
    You bloggers, in my experience, make a lot of significant errors like this.
    Reply
  •  
    Aug 12 09:10 AM
    at last someone with the common sense of taking apart an argument and analysing it before spilling so much saliva: synonyms analyze, dissect, break down mean to divide a complex whole into its parts or elements. analyze suggests separating or distinguishing the component parts of something (as a substance, a process, a situation) so as to discover its true nature or inner relationships . dissect suggests a searching analysis by laying bare parts or pieces for individual scrutiny <commentators dissected every word of the speech>. break down implies a reducing to simpler parts or divisions <break down the budget
    Reply
  •  
    Aug 12 09:15 AM
    Burtbeck, read the covenants. The interest payments made during that time get subtracted from the convert price and only the difference is made up in cash.

    And don't forget because they only issue the difference in cash those converted shares are then used to cover what the finaciers borrowed and shorted in the arb play. So it also actually adds buying pressure for a time.
    Reply
  •  
    Aug 12 09:41 AM
    Ripped: I believe you are wrong. The holders of the converts will demand #300.000,000.00 cash redemption next February if it is cheaper to buy shares in the open market, which is certainly the case if below $4.41. There would not be ANY converted shares. And the interest they collect along the way has nothing to do with it.
    Reply
  •  
    Aug 12 10:21 AM
    I’m sorry Brandon but “Debt is a Non Issue” is terribly misleading. Any debt that the company has decreases Shareholder Equity and I know you know this. Refinancing older debt at higher interest rates impacts both FCF and Shareholder Equity. Converts, even thought they are not technically, according to GAAP standards, dilutive to the common shares, still put downward pressure on the price of the stock because of the short position taken by the purchasers of the notes for as long as they exist. Just because there are credit facilities out there and debt can be refinanced, doesn’t make it a Non Issue. It keeps them from bankruptcy but hardly paints a great picture moving forward and understates the impact of “Debt”.

    I am a strong supporter of Sirius XM and and investor. As an Investor "Debt" near term or in five years is an "Issue" to me. At a time when we need clarity on the Debt of this company, this article does nothing but confuse the relevance of the company's debt moving forward.
    Reply
  •  
    Aug 12 10:50 AM
    Brandon, if you will listen to Sirius Conference Call you will here Mel address this particular issue. He spells out in detail the amount and dates that 2009 debt will be due. His comment about this issue is that hopefully the debt markets will have improved by the time these outstanding obligations become due.
    Reply
  •  
    Aug 12 11:19 AM
    I went to the Sirius Conference call and obtained the following information at about the 12:00 minute mark:

    $300mm $4.41 converts due 2/09
    $350mm Bank Debt due 5/09
    $400mm converts due 12/09

    With this being over $1 Billon in debt that is coming due I would have to think it will be a very important issue if credit markets deterioate.
    Reply
  •  
    Aug 12 11:20 AM
    I believe Mel or Frear said the 1.75% notes were due in 12/09
    Reply
  •  
    Aug 12 11:21 AM
    AGIA, agreed....
    Reply
  •  
    Aug 12 11:39 AM
    if Siri had no debt , their stock price would be 40.00 a share ......debt matters ....duh
    Reply
  •  
    Aug 12 12:13 PM
    Lets look at what is coming up in the market for SIRI...are they going to Benefit form the holiday season? Are they ready for it? are they hammering out contracts with US, and Foreign auto makers for Satellite Radio car implants in all new models....Where are they spending their marketing dollars? Just some stuff I want i want know?
    Reply
  •  
    Aug 12 12:37 PM
    So when is the FCC going to be punished for what hey did to these companies, and us Americans faith in our government to do the right thing in a temely manner ???? No investigations nothing!
    Reply
  •  
    Aug 12 12:50 PM
    disappointed American, No just as I said, once it was apporved nobody cares, just like what happen with the DOJ.
    Reply
  •  
    Aug 12 01:50 PM
    Scot here. Mr. Vicar, click on bio and other articles by Brandon Matthews: "Karmazin Delivers in Mad Money Interview." August 12.

    Scot's Slant
    Reply
  •  
    Aug 12 01:56 PM
    I wonder if this stock is capable of having 2 up days in a row. What will it take? Shorts having to buy? Another appearance by Mel? It seems like this stock will be having difficulty getting past the $1.50 per share amount. Wow, it seems like just a month ago we were wondering if it would actually get up over $4 per share post merger! lol
    Reply
  •  
    Aug 12 02:34 PM
    Yeah, I agree Debt sment! Profits smofits. All that really matters is how good you look in the morning!
    Reply
  •  
    Aug 12 03:51 PM
    cos1000 . . . may I say that I respect your balanced view and well-reasoned opinion on this critical issue!

    The current debt structure hangs a massive mushroom cloud over the common shares. The normally applied metrics will likely have very little impact on share price until this cloud is lifted.

    Brandon . . . back to the drawing-board on this one. More detail please on the 12/09 converts.

    Reply
  •  
    Aug 12 04:10 PM
    Sirius Roadkill, now there you go spinning out of control with mushroom clouds and weather forecasts of clouds lifting. I simply took issue with "debt being a non issue to investors".

    For a complete breakdown of all the debt due in 2009 for the new company there is an excellent breakdown of it under the posts of this article on SiriusBuzz.com by a contributer. Check it out..
    Reply
  •  
    Aug 12 06:12 PM
    Negative shareholder equity, that is, when you buy shares of sirius you owe money (form 10K). Don't know about this, but a 4 billion dollar company that has never turned a profit and is at 20% penetration of the market (may be close to full penetration who knows?). Do your own research and don't rely on these fucking wannabe experts. It's your money.
    Peace
    Reply
  •  
    Aug 12 09:46 PM
    I urge Carl Ichan to buy 50 million shares of SIRI by the end of this week. This will have the shorts running for cover. SIRI is a common man's stock. I bet so much money on it . Feel like crying now.
    Reply
  •  
    Aug 12 10:01 PM
    This whole debt issue comes down to one question. Are you an optimist or are you a pessimist? If you think there are synergies there, and the number of subscribers will grow enough to take care of the debt issue, then you buy. If you think there are no synergies and subscriber numbers will stay flat or fall, then you don't buy, or you short the stock.

    If you're an optimist, and you turn out to be right, your upside is huge.

    One illustration: In 3 years, the price freeze required by the agreement with the FCC will be lifted. If new subscribers continue to grow at the current rate, there will be around 35 million subscribers. If the company takes the standard package from 12.99 to 14.99 at that point, it will mean 70 million more dollars per month that goes right to the bottom line. That is 840 million a year. If you put a PE of 30 on it (about that of Yahoo and Comcast), you get an increase of 25 billion dollars in market cap. That is a six fold increase in the stock price from here just on a 2 dollar price increase. You don't need too many of those in a lifetime to set you up.

    I like Mel because he's an optimist. An optimist knows what this company is capable of.
    Reply
  •  
    Aug 12 10:57 PM
    good post jay, user11380 , i understand your pain, the big houses want your shares, they want to drag this thing down. they don't care about the little guy like me and many others. there NOT gettin mine !! the more of us that give up , the more the share goes down. sell now & take a big loss , or, wait till news after labor day, wich could be the catylst we need to get things goin. wall st. has got mel k. jacked up, and he's on a mission. this guy makes things happen! position long.
    Reply
  •  
    Aug 12 11:46 PM
    Trouble getting over $1.50? Sure, but do you know why? Shorts and accumulating institutions have torpedoed the stock (Cramer's saying is "damaged stock, not damaged company") for massive volume covering and accumulating at a discount. They will move it back up when they are ready.
    Reply
  •  
    Aug 13 02:44 AM
    have you guys noticed the ads all over the internet? Yahoo, comcast,etc. I have seen Srius ads in every page I have visited in the past three days.....
    Reply
  •  
    Aug 13 11:01 AM
    The fools are selling again.
    Reply
  •  
    Aug 13 11:03 AM
    Marcopolodec.

    The Siri ads are popping up everywhere because you searched for siri. The search engine knows this and drops ads according to what you are look for.

    If you searched for Mazda or BMWs than pop up ads of that product will appear more often.
    Reply
  •  
    Aug 13 02:25 PM
    Mel has even said that raising the money for this was "very ugly" but he had to close the merger and do what was needed. Ya it's a lot of money, but the sooner they can put this behind them, they sooner they can deal with growing cash flow. Even though sentiment is extremely down right now (www.predictwallstreet....), after there Labor Day conference, I think some faith will be restored in SIRI as shareholders will know what the next moves for the company are.
    Reply
  •  
    Aug 13 05:39 PM
    This stock is having trouble getting above $1.50 because it isn't worth more than $1.50. 3 billion shares outstanding, more dilution coming, and the vast majority of cash flows are more than 10 years out. Why would this stock be worth more than $1.50?
    Reply
  •  
    Aug 13 07:26 PM
    walgreens buying RITE AID
    Reply
  •  
    Aug 13 08:50 PM
    Brandon:
    You scrub my post and leave this trash?
    Time to close the thread
    Reply
  •  
    Aug 14 12:25 AM
    1.50 may or may not be cheap. Mel said in an interview that sirius shareholders are not sophisticated though they love the company. What matters is the market cap, which is around 4 billion according to analysts. Mel is not a "Wall Street guy" he is a salesman. So as shares get more and more diluted, the price of the share goes lower. The market cap can stay the same though. Feel your pain though. Sold mine at a loss of about 14% which is far from pleasant. Did make money on it around 2002, though, trading on the hype in retrospect.
    Reply
  •  
    Aug 14 05:45 PM
    Konst, not for nothing but please explain your statement that shares are getting more and more diluted. I have heard your music, not bad and good luck with that, but what are you basing your statement of diluted shares on? Convertible Arbitrage on XM notes? To bad you sold at a loss, you should consider getting back in at these prices. Definitely not a lot of "Hype" on the shares now.
    Reply
  •  
    Aug 14 10:18 PM
    your "understanding&qu... of the debt markets is almost comical... have you read the news lately? Debt is not cheap anymore - and for a Caa2 rated company on negative watch, it's enough to crush you.

    Author writes: "...refinancing those notes should not be a problem."

    should not be a problem, huh?.... let's see, SiriXM just went to market and borrowed ~$700mil to be paid back in 2013... and what did that cost them? 16%... per year. You call that "no problem"?
    (that is, they borrowed ~$700mil for 5yrs, but they are paying 13% of $778.5mil per year in interest and $778.5mil back at maturity -- they borrowed $778.5mil at $.90 on the dollar. That's a 16% yield to maturity. They back-loaded it -- that's what strapped companies do.)

    and the convertibles? they should be pretty easy to reissue if needed, right? After all, "credit markets exist for a reason", right? They just issued $550mil in converts under the XM name.... they probably paid around the same 1.75%cpn on those as their outstanding notes, right? Not quite -- they are paying 7.00% per year on those.

    No problem... just refinance... credit markets exist for a reason... wow...
    Reply
  •  
    Aug 14 10:37 PM
    after re-reading, I seriously cannot believe this article is posted here.... and that only 1 or 2 people have called out the author on his BLATANT mistakes and omissions...

    SiriXM has $300 MILLION of converts due 2/09 exchangable at $4.41.... looong shot...

    ...then another $400 MILLION of converts due 12/09 exchangeable at $10.87... again, loooong shot.... and these issues only make it less likely...

    The author was right though, on the 8.75%s of 9/09... there's only $1.7mil of those... exchangeable at $28.46....

    There's also a $350mil credit line due 5/09.

    ...but this should all be a "non issue for investors"....

    I can't believe what I'm reading here... and all these longs have NO IDEA about this...
    Reply
  •  
    Aug 16 08:05 AM
    jswede, I am a long and believe me I have an IDEA about how serious the debt issues are and how inaccurate this article is.
    Reply
  •  
    Aug 16 08:08 AM
    For instance, XM's 400 Mil, 1.75% Convertible Bond was refinance in May, 08, at 10% with a 10.87 / share price to convert and is due on 12/1/09 for one.
    Reply
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