Last week it was announced that Sirius XM (NASDAQ:SIRI) closed on a $1.25 billion line of credit. Upon seeing the news I knew that it was the first step in seeing the company begin a long awaited share buyback program. Since that point in time I have received numerous comments and e-mails regarding whether or not borrowing money to buy back shares is a good idea. The answer is not usually a simple yes or know, but in this case it is a resounding YES.
While it may seem counter intuitive, not all debt is bad. Having a credit facility is not bad either. The key with debt is managing that debt in such a way that the benefits outweigh the drawbacks.
The first thing we need to understand is whether or not the company can handle the debt load. In other words, is Sirius XM able to service the debt without sacrificing other needed components for operations and business growth.
Standard and Poor's answered that question this week when they stated that the credit rating for Sirius XM remains unchanged even with the new credit facility, the $2 billion share buyback announcement, and the special 5 cent dividend that Sirius XM will pay out this month. Essentially S&P stated that the company operations, outlook, and growth trajectory are all able to handle the added debt.
We do not expect leverage will increase above our 4.5x target for the company at the current rating despite its adoption of a more aggressive financial policy, because of its moderate debt leverage,good operating outlook, and growing discretionary cash flow.
Sirius XM is not mortgaging the house to do a share buyback. Far from it. It is essentially mortgaging revenues from the next 18 months of Free Cash Flow. Sirius XM mortgaged the house when it did the Liberty Media (NASDAQ:LMCA) deal. The difference here is STARK.
What we need to understand is that this move begins to address a few problems for the company. It is the start of getting an astronomical share count down, and it also allows for a final resolution to the situation with Liberty Media, control, and the eventual path this company will take. That will provide the street with a bit more certainty surrounding the company. The faster that Liberty is able to gain control, the faster we will begin to understand the outlook, strategic moves, and direction of the company.
Sirius XM has been working hard to get costs under control, take out high interest debt, and improve the financials. This credit facility, share buyback, and dividend will allow that process to be smoother. As an investor in Sirius XM I appreciate that. As an investor in Liberty Media I REALLY appreciate that.
Make no mistake, this action is taking place because the company got itself painted into a corner in 2009. That is behind the company now though, and the best course of action is one that allows the company to prosper further. For the time being, the share buyback is a good thing. The company is doing very well, is generating cash and growth, and the current debt load can be handled by existing levels of operation. There will be a day when the growth curve flattens, but decline is not yet in the cards, so it presents little worry over the next couple of years.
As investors, we see a clear path that this added debt from the credit facility is handled with ease. This is supported by the comments from Standard & Poor's. The key now is watching the fundamental performance of the company and seeing the share count diminish. The next real hurdle is the convertable bonds, but that is another discussion altogether.
Disclosure: I am long SIRI, LMCA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.