Sirius XM Radio (SIRI) announced it has offered $400 million of new debt to "qualified institutional buyers." The Senior Notes will carry a 5.25% coupon and will be due in 2022. The company states that it will:
use the net proceeds from the offering for general corporate purposes, which may include, from time to time and as market conditions warrant, the repurchase, redemption, defeasance, tender or repayment of its outstanding indebtedness, including its 13% Senior Notes due 2013. Pending application of these amounts as provided above, SiriusXM currently expects to maintain any excess amount as cash on hand.
Sirius XM has been paying down the 13% notes during the first half of the year, and according to the second quarter 10K, there was a balance of $681,517,000 of the initial $778,500,000 remaining. Previously, the company disclosed that next month it would be calling the 9.75% Notes due 2015. The balance remaining on these notes is $186,112,000.
It is not a total surprise that the company is taking advantage of its improved balance sheet to obtain debt at significantly lower interest rates. What is somewhat unusual is that it is doing so while the company is flush with cash. Sirius XM ended June with more than $868 million in "cash and cash equivalents," nearly enough to pay off both issues.
Sirius XM has projected $700 million of free cash flow ("FCF") this year, and it is expected that in 2013 the FCF could top $1 billion. Clearly, the company has more than enough cash on hand and flowing into the company to redeem the debt without going into the market. That being the case, why is Sirius XM raising new debt?
Part of the answer may be tied to the discussions with Liberty Media (LMCA) over control of Sirius XM. Currently, Liberty has veto rights over Sirius XM incurring new debt, so this transaction had to have been approved by Liberty. On its Q2 conference call on August 8th, Liberty CEO Greg Maffei said, "Our view is that Sirius is under leveraged..." This is a view similar to that expressed by Sirius XM CEO Mel Karmazin who noted that he was comfortable with a leverage ratio of 3x - a ratio that the company went below for the first time at the end of the first quarter.
With FCF building at Sirius XM, and with enough cash on hand and cash coming into the company to meet the 9.75% and 13% debt, investors should be asking: "Why is the company going to the credit markets at this time?" Is it just possible that Sirius XM is close to initiating a share buyback that would put Liberty in control?
Stranger things have happened.
Disclosure: I am long SIRI.
Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, at any time. I have no positions, or any plans to open positions in the next 72 hours, in any of the other companies mentioned in this article.