Senior Notes due 2024 to qualified institutional buyers ...outside the United States in compliance with Regulation S of the Securities Act.
Within hours, the company disclosed that the offering size had been doubled to $1.5 billion, the coupon rate would be 6% and was priced to investors at 100%.
In a recent article I speculated about the company's current share purchase authorization, its projected free cash flow for the remainder of the year, the amount available under its revolver and how much additional debt it could raise based on its own leverage targets and EBITDA targets. Those plans have become clearer with the size of the new offering and how quickly it was brought to market. To recap those projections,
- As of April 25th, the company had $1,687,640,000 remaining under its current share purchase authorizations
- As of the end of March, the company had already generated $222,789,000 of its expected guidance of $1.1 billion of free cash flow, indicating it would generate $877,211,000 over the final three quarters of the year.
- At the end of Q1, the company had $940 million available under its revolver.
- After completing the buybacks that took place at the end of the quarter through April 25th, the company would have spent $468.9 million of cash on hand and/or additional borrowings under its revolver.
Based on those assumptions and data, I concluded:
...although the company has $1,687.6 million remaining under its authorization, it won't be able to fulfill that authorization in 2014 unless it raises more than $400 million of new debt. Furthermore, it will be limited in its share buybacks throughout the year as more than half the amount is dependent on free cash flow that has not yet been generated.
On the recent conference call, Sirius CFO David Frear stated:
...Our leverage at the end of quarter stands at [2.8] times including nearly half a turn related to our deep in the money 7% exchangeable notes. We are likely to tap periods of opportunity in the bond market to issue new debt and to replace the 7% notes that will convert into equity in December of this year. As Jim mentioned we are confident of achieving our guidance for the year.
Frear wasted very little time to "tap those periods of opportunity" to raise a lot of cash and increase the company's leverage. Far more than the minimum of $400 million dollars needed to fulfill the authorization by the end of 2014. So, what's next on the agenda? The press release states the funds will be used "for general corporate purposes" and may be used for:
the repurchase, redemption, defeasance, tender or repayment of its outstanding senior or subordinated indebtedness, including any borrowings outstanding under its revolving credit facility, and dividends to SiriusXM, its parent corporation, to fund share repurchases of SiriusXM's common stock.
With the rate at 6%, the new debt carries an interest rate higher than all of the company's other debt, with the exception of its 7% Exchangeable Notes, so it would seem unlikely that it would redeem any other debt. That leaves three likely alternatives.
- Redemption of the Notes
- Pay down the revolver
- Resume aggressive repurchase of stock
I believe the repurchase of the Notes as unlikely. It has been thought that a large portion of the short interest of Sirius stock was used in hedging transactions against the Notes while the holders sat back and collected the 7% interest with no money tied up. In fact, when these Notes were issued at the time of the merger, Sirius loaned shares to the underwriters to facilitate shorting. Those shares have since been returned, although it remains a strong possibility that replacement shares have been used to maintain a short position.
It is not clear how receptive the Note holders would be to a purchase offer. When Liberty Media (NASDAQ:LMCA) took control of Sirius, a change of control provision in the Notes triggered a redemption premium. The premium increased the number of shares underlying the Notes from 543.1732 to 581.3112 per $1,000 Note. In order to take advantage of the bonus offer of 38.1380 additional shares, the holders of the Notes had to accept the offer within 30 days. Even though the offer represented a 7% premium in the number of shares, less than 10% of the Notes were redeemed. (Investors might be interested to know that the share price around the date of the offer was quite close to where it is today.)
With the shares closing at $3.22 yesterday, the value of the shares underlying the Notes would be $1,749, and the Notes should be trading above that level. How much of a premium would need to be offered above that price to make it attractive is not at all clear, and if the positions are hedged, the holders of the Notes have the alternative of sitting back and collecting the final $35/Note interest payment in six months and delivering the shares at that time.
Could Sirius pay off the revolver? Perhaps. There are a number of fees and rules for determining the interest rate on the revolver. The rate is impacted by the amount drawn, the leverage ratio and the rates for LIBOR, the Federal Funds Rate and the Prime Rate. It's possible that it would be paid down, but there are fees to simply have the revolver, fees when amounts are drawn and the interest payments.
I believe that we will see the funds used to pay a dividend from Sirius XM Radio Inc. up to Sirius XM Holdings in order that Holdings can aggressively pursue its authorized share buybacks. The current share price is comparable to the average price of $3.24 it paid during the first two quarters of 2013 when the company spent more than $1.1 billion buying 352.6 million shares.
I also believe that the process will be similar to last year. Substantial open market purchases followed by a purchase agreement with its parent, Liberty. Liberty has its own need to raise cash. It is likely to increase its ownership in Charter Communications (NASDAQ:CHTR), and Charter will need funds to pursue an asset purchase from Comcast (NASDAQ:CMCSA).
At the same time, Liberty has announced plans to create two tracking stocks later this year. A share sale to Sirius will allow Liberty to move the cash into the tracking stock that includes its stake in Charter. I have to believe that Liberty is the driving force behind the sudden move by Sirius to take on $1.5 billion in debt.
And, if Sirius is about to start paying another $90 million a year in interest, the money should not be left idle. That should lead to increased buying pressure and a near-term rise in the price of Sirius shares.
Disclosure: I am long SIRI, CMCSA. 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.
Additional disclosure: In addition to my long positions in CMCSA and SIRI, I have June 2014 and January 2015 $4 covered calls written against several of the SIRI 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.