Sirius XM (SIRI) announced today its intention to borrow $600 million at a rate of 5.70%. The bonds will be sold outside the United Sates, and will be used along with cash on hand to retire higher interest notes which are due in 2015. The notes being retired carry an interest rate of 8.75%. The new notes are due in 2021.
Sirius XM has $800 million tied to the notes due in 2015. The new debt offering will cover the bulk of that, with cash covering the rest. Essentially, the company is removing $171 million in debt and lowering the interest rate on the remaining debt by over 3 basis points.
This news is very positive. It helps improve free cash flow by a lower principle amount in combination with less interest. It is interesting that these bonds were specifically designed for sale outside the United States. It would indicate that the company has some attractive fundamental characteristics that appear attractive to an investor or group of investors.
One thing that the company has expressed is that they want to maintain a debt to EBITDA ratio of 3.5 to 1. Currently, excluding the untapped $1.25 billion credit facility, the company sits at a ratio of just under 3. The potential debt picture, using an assumed EBITDA of $1.37 billion in 2014 and assuming that the credit facility is fully used, the ratio would be just over 3. Essentially, that means there is room to take on more debt if needed. Such debt could be used to increase the share buyback program. The current $2 billion dollar share buyback program has about 3 months left if the pace of buybacks remains the same.
While many people do not consider debt as good, smart debt can be a very effective tool. With the types of rates Sirius XM is garnering these days, this borrowed money is cheap. The next debt issue that will likely be addressed in some manner is the 2014 debt which is often referred to as toxic because the notes can convert into about 273 shares. That is due to happen in 2014. The company has, in the past, offered to take these notes out, but there were few takers. Once the 8.75% notes and the converts are taken out, the highest interest rate notes will be the 7.625% notes due 2018. Certainly the company may get aggressive with those notes as well at some point.
For investors this new bond issue is yet another positive on the fundamental story that is Sirius XM. Combined with a record setting quarter and increasing auto sales, this company is setting up for quarterly reports that are even more impressive than the most recent. Stay Tuned.