Back in April I wrote an article explaining how I believed that Sirius XM (SIRI) was "absolutely critical" to majority owner Liberty Media (LMCA). The premise? Sirius XM makes up such a large portion of Liberty Media's market cap that Liberty would not likely have an interest in divesting itself of its stake in Sirius XM quickly.
Liberty Media's market capitalization allows Liberty Media to access cash by leveraging Liberty Media.
And why is this critical for holders of Sirius XM? Because if you have the jitters that majority owner Liberty Media will be in a hurry to over leverage Sirius XM in order to buy back Liberty's high basis portion of its take stake so that Liberty may perform a Reverse Morris Trust, your worry may be misplaced. You may find comfort in the understanding that Sirius XM's contribution to Liberty Media's market cap gives Liberty Media some very serious leverage.
It all goes back to a year ago when I suggested that Liberty Media was a burger, and Sirius XM was the meat. I was laughed at during that time by some, but the fact of the matter still remains. The vast majority of Liberty's market cap comes from its holdings in the satellite radio provider.
Fast forward to today. What was used as collateral by Liberty Media in the margin loan taken to purchase the large stake in Charter Communications (CHTR)? In majority, shares of Sirius XM.
From the 13D filing:
On April 30, 2013, Liberty SIRI Marginco, LLC, a wholly-owned special purpose subsidiary of the Reporting Person, entered into a margin loan agreement with Merrill Lynch International, as administrative agent and calculation agent, Bank of America, N.A., as a lender, and Citibank, N.A., as a lender.
The loan agreement permits the borrower, subject to certain funding conditions, to borrow up to $1.0 billion, consisting of a $250 million term loan and up to $750 million on a revolving credit basis.
On April 30, 2013, $700 million in loans (the $250 million term loan and $450 million in revolving loans) were made to the borrower under the loan agreement, with $300 million in revolving commitments still available for future loans.
Additionally, up to $1.0 billion in loans may be extended under the loan agreement in the form of incremental loans, subject to the satisfaction of certain conditions. The maximum amount of loans available to the borrower under the loan agreement (including the maximum amount of potential incremental loans) is $2.0 billion.
The maturity date of all loans under the loan agreement is October 30, 2014. The proceeds of this loan were used, in part, to allow Liberty to acquire, pursuant to a stock purchase agreement previously executed with various investment funds: (I) shares of Class A common stock, par value $0.001 per share of Charter Communications, Inc. ("Charter Common Stock"), and (ii) warrants to purchase additional shares of Charter Common Stock at various prices.
The borrower's obligations under the loan agreement are fully and unconditionally guaranteed by Liberty and secured by a first priority lien on a basket of publicly traded common stocks owned by Liberty, including shares of Common Stock.
719,919,656 shares of Common Stock were pledged by the borrower as of the closing date, and the borrower may pledge up to 573,568,724 additional shares of Common Stock under the terms of the loan agreement.
Further, upon and following the incurrence of any incremental loans, the borrower may pledge up to an additional 306,511,620 shares of Common Stock (for a total maximum pledge of 1,600,000,000 shares of Common Stock).
If the borrower defaults on its obligations under the loan agreement or Liberty defaults on its obligations under its guaranty, then the lenders can declare all borrowings outstanding under the loan agreement, with accrued interest, to be immediately due and payable, and if the borrower and the Company are unable to pay such amounts, the lenders may foreclose on the pledged stock and any other collateral that then secures the borrower's obligations under the loan agreement.
In referring to 'Common Stock' above, it is referring to shares of Sirius XM.
The rest can be kept simple, short and sweet.
Liberty Media used part of its stake in Sirius XM as collateral for a margin loan to secure cash it needed to purchase a stake in Charter Communications. The filing also shows that there is flexibility within the agreement for Liberty to draw more cash and margin more shares as needed, up to nearly half its stake in Sirius XM.
And with Sirius XM being an asset that is expected to appreciate, and likely appreciate at rates that should exceed loan costs, why not use borrowed money and hold onto that stake instead of selling or spinning out rapidly in an RMT? If I have an asset that is appreciating by 15% or more per year, and someone will lend me cash against that asset at 5%, is it not wiser to hold the asset, borrow the cash, and net roughly 10% or more gain?
Liberty Media is likely in no hurry to divest itself of, and spin out Sirius XM in an RMT. If Liberty really needs the cash, Sirius XM is capable of repurchasing shares from Liberty so that Liberty may satisfy its obligations. This is a win win situation for Liberty, and arguably a win win situation for Sirius XM investors who may have been concerned that Liberty Media would be in a rush to over leverage the company and spin it out quickly.
Additional disclosure: I am long SIRI January 2014 $2 and $2.50 calls.