Syntax-Brillian: New Financing Fails to Rally Stock

When Syntax-Brillian Corporation (BRLC) first announced that they had obtained $250 million of financing through a senior secured credit facility arranged by Silver Point Finance on October 30, the stock was up as much as over 5% during mid-day trading. However, the stock lost most of its gains near the end of the day and closed up only 1.8% at $4.56. While the announcement of a five-year $250 million loan on the surface appears to be an extremely positive development for Syntax-Brillian, looking at the actual terms of the financing might produce a different opinion.

The loan requires Syntax-Brillian to pay interest rates at either LIBOR plus 6% or Prime plus 5%. The current prime rate is 7.75% while current LIBOR rates ranges mainly between 5-6%. This would give an interest rate of 11-13% for Syntax-Brillian's loan, which is significantly high. Even junk bonds commonly pay interest rates of 10 to 13 percent. The lofty interest rate and the fact the loan is secured indicates the high risk the lenders perceive in regards to Syntax-Brillian and it operations.

In addition to the high interest rates, Silver Point will also get 10-year warrants exercisable into 5.28 million shares with an exercise price of a penny a share. Syntax-Brillian currently has approximately 93 million shares outstanding. James Li, President and CEO of Syntax Brillian, said in an interview with Barron's earlier in October that he wouldn't sell more equity since with the stock under $5 diluting holders' shares "is just not a smart thing to do." It appears Li is keeping his word of not selling the companies' stock. Rather he is giving it away at a penny a share under the terms of the financing. Although when the warrants are exercised, it will dilute shareholders just the same.

Having to give the 5.28 million warrants to Silver Point actually raises the effective interest rate over the 11-13% rate the company will have to pay. Assuming the warrants are exercised at the October 30th closing price of $4.56, the value would be about $24 million. Allocated evenly over the five years of the loan and the effective interest rates would increase 1.9%. This results in an effective rate of 13-15% for the loan.

Closely examining the loan results in a much less positive event then the "Syntax-Brillian Gets $250M Financing" that appears in many headlines. Of course, with the cash flow issues that plague the company, Syntax-Brillian is in dire need of financing. Cash flow from operations was negative $194 million for fiscal 2007 for the company. Even with effective rates at 13 to 15 percent or higher; the company does not have much of a choice. The terms of the loan illustrates the financial community's lack of confidence in the company and its future. It also shows how lenders are aware of the desperate need of financing for Syntax-Brillian. It would probably be difficult for the company to obtain loans at better rates.

Although obtaining the loan is better then diluting shareholders even further. Syntax-Brillian only conducted a secondary offering for $128 million at 25 million shares just five months ago in May. Having another secondary will just further aggravate shareholders given the company's stock is down 30% in 3 months and down 61% from its 52 week high.

Disclosure: Author has a short position in BRLC

Comments

[James Cullen:]

Per Vince Sollitto: We have been approached as a result of the [10-]K being filed and for those people who are in the industry, they’ve looked at the K and said, ‘this is a really good company, they have some growing pains and some process problems but basically Ernst & Young gave them a clean bill of health, and if you look at the numbers and the financials and the fundamentals, if we give them $100 million in debt, they should be able to in 12 months be able to turn that into $400 million in revenue and $40 million in operating profit.’

It's about ROIC-WACC, you figure it out.

2007 Nov 01 10:30 AM

[Baron D.:]

Samina's Disclosure of a short position in BRLC says it all. Syntax-Brillian is strong and growing stronger. James Li, President and CEO and done a fine job and will grow BRLC into a multibillion dollar business in a few years, no doubt. Actual terms of the financing are just fine despite Sanmina's "bashing."

The financial community's confidence in Syntax-Brillian is very positive and clearly reflects it's clean bill of health.

2007 Nov 01 05:05 PM

[KRT:]

Samina is a bone head. He is short and will spin any news as negative. Long investors knew a negative spin would be posted by Samina.

2007 Nov 01 06:59 PM

[RC Martin:]

A wonderful regurgitation of what the entire universe already knew, but what about the new cash? I suppose they'll prolly do something with that cash however Sammy seems to overlook entirely the FACTS. I mean after all if you need cash to finance product, the demand for which is 3X what your current capital can support, then it seems logical to seek more capital. While some continue to attempt to portray the situation as dire it certainly appears to be a good thing whenever you can bolster production and sell everything you can produce. Sammy will be singing a different tune before too long, no pun intended. BTW it would be nice if just once this Sammy fella could be original.

2007 Nov 02 01:33 PM

[RC Martin:]

A wonderful regurgitation of what the entire universe already knew, but what about the new cash? I suppose they'll prolly do something with that cash however Sammy seems to overlook entirely the FACTS. I mean after all if you need cash to finance product, the demand for which is 3X what your current capital can support, then it seems logical to seek more capital. While some continue to attempt to portray the situation as dire it certainly appears to be a good thing whenever you can bolster production and sell everything you can produce. Sammy will be singing a different tune before too long, no pun intended. BTW it would be nice if just once this Sammy fella could be original.

2007 Nov 02 01:33 PM

[buysideretired:]

I read the same ol sXXt from the same ol dork author, Dumb Sam.

Time to take SA off my bookmarks......

A trashpile has lots of flies I guess... BSR

2007 Nov 02 01:43 PM

[RC Martin:]

Buyside, Don't let this dull hatchet get you down. Heck we predicted he would be droning dull data diatribes yesterday. He's as predictable as the sun rising and transparent as glass.

But originality is not his cup of tea. This guy's next original thought will be his first.

2007 Nov 02 02:03 PM

[Jalek:]

The sad thing is that this is the only stock he even comments on, so this is the best he's got.

2007 Nov 05 05:37 PM

[Carson Allen:]

Samuel, as a comment to your 12/4/2007 Seeking Alpha article, "International Competition Between Syntax-Brillian and Vizio Heating Up," I posted the following comment. I have not yet received a response, however:

Samuel, without arguing the merits of BRLC, your responses to comments on this article reveal important facts that you have not previously disclosed.

Your responses to these comments reveal that you work for a firm (I assume a hedge fund) that has a short position in BRLC. The firm you work for also has a long position in Amtran, a major shareholder and manufacturer for Visio. As your article points out Visio is a major competitor to BRLC.

Several questions:
1. Will you disclose the name of your employer?
2. Is your employer aware of articles you've posted on Seeking Alpha?
3. Does your employer review or in any sense approve these articles in advance?

We all realize that authors who post articles on Seeking Alpha have a specific point of view, which is as it should be. Readers may not be fully aware, however, that content is subject to the same hidden agendas as many message boards.

I would suggest you provide full, clear disclosure. Thank you.

2007 Dec 06 06:07 PM