- Amendment To Sirius XM Revolver increases allowable leverage.
- Increased leverage affects restricted payments, including ability to pay dividend.
- Increase should allow share buyback to resume.
A frequent critic of this author expressed disappointment that I did not put out an article about an 8K filed by Sirius XM Holdings (NASDAQ:SIRI) April 22nd. The issue raised by Seeking Alpha commenter sirifair6 was on a recent article of mine:
I am curious, if the author is so smart, why wouldn't he state an obvious fact that we just found out yesterday that Sirius XM is gearing up its finances to pay a dividend. This would probably be of interest to siri shareholders. I think this is the news to talk about rather than meditate what may or may not happen with the future.
Well, first I would like to thank sirifair6 for allowing the possibility that this author might be "so smart" and second, I would simply state the reason I had not written about this was quite simple. I hadn't seen it yet. So, for sirifair6, and others that may be interested, what follows is an explanation of what the filing stated and its possible implications.
The filing is about an amendment to Sirius XM's $1.25 billion revolving credit facility opened in early December of 2012. The 8K is relatively short, and is mostly comprised of the amendment. It begins with the following brief description:
Item 1.01 Entry into a Material Definitive Agreement
On April 22, 2014, our subsidiary, Sirius XM Radio Inc. ("SiriusXM"), entered into an amendment to its existing $1.25 billion five-year senior secured revolving credit facility with JPMorgan Chase Bank, N.A...
The amendment modified the negative covenant contained in the revolving credit facility regarding restricted payments. Pursuant to the amendment, SiriusXM will be permitted to make restricted payments, which include dividend payments to us, so long as, after giving effect to such payment, SiriusXM's total leverage ratio for the four consecutive fiscal quarters most recently ended is no greater than 4.5 to 1.0; and both before and after giving effect to such payment, no default or event of default has occurred and is continuing.
In addition, the text of the amendment states the following:
Section 6.05(o) of the Credit Agreement is hereby amended by deleting the reference to "3.5 to 1.0" therein and replacing it with "4.5 to 1.0".
The leverage ratio is a measure of the company's indebtedness to its consolidated operating cash flow, a figure somewhat different than the more familiar free cash flow, which Sirius reported as $927 million in 2013 and expects to reach $1.1 billion in 2014. Increasing the ratio from 3.5 to 1 up to 4.5 to 1 could allow the company to add more than $1 billion of additional debt in the near term.
Some investors seem to have focused on the word "dividend." Does this mean that we investors should expect to see a dividend in the near future? I don't think so. Look at the 8K carefully. It was filed by Sirius XM Holdings Inc. and discusses the credit agreement of SiriusXM Radio Inc.
I view the following as the key phrase: "SiriusXM will be permitted to make restricted payments, which include dividend payments to us". Further, I interpret this as stating that the subsidiary, SiriusXM Radio Inc. ["Radio"] will now be permitted to pay a dividend to Sirius XM Holdings Inc. ["Holdings"] even if the leverage rises to 4.5 to 1.
One of the benefits of a holding company structure is that it allows a subsidiary to pay a tax free dividend up to the parent. The net result is that Radio will be able to borrow more money and move that money up to Holdings. From there, Holdings can use the dividend to purchase additional shares under its authorizations.
This is the second announcement in the past two weeks that has had an impact on the Sirius buyback program. Despite an increase in the share buyback authorization from $2 billion to $4 billion back in October, there were apparently restrictions in both the 5.25% notes due 2022 and the revolver that precluded borrowing significant additional amounts and using those amounts for buybacks. It also helps explain why the Liberty Media (NASDAQ:LMCA) $500 million sale to Holdings that was agreed to in October was scheduled to take place in three installments ending on April 24th.
Those investors that had been looking for buybacks to continue and wondering why the program appeared to come to a screeching halt now have a bit more information. Those investors looking for a dividend are likely to be disappointed. As for sirifair6? Well, earnings are about to be released, and I'm sure that I will be able to write a new article that will satisfy his desire to criticize.
Additional disclosure: In addition to my long positions in SIRI, I have January 2015 $4 covered calls written against several of these positions. I also actively trade SIRI. I may initiate new covered call positions or close out or open new positions in SIRI at any time. I have no plans to trade any of the other stocks discussed in this article within the next 72 hours