Sirius XM Radio (SIRI) has been in the news a lot this week.
- On Tuesday the company released its earnings and increased adjusted EBITDA guidance to $900 million.
- On Wednesday Sirius XM announced it was taking on $400 million of new debt at 5.25%.
- Also on Wednesday, Liberty Media (LMCA), Sirius XM's largest shareholder, released its second quarter earnings release and held its conference call.
Lost in all the news was this item by Moody's Investor Service: Moody's Upgrades Sirius XM's CFR [Corporate Family Rating] to B1 and PDR [Probability of Default] to Ba3, Assigns B1 Rating to New Senior Notes. Not only did Moody's upgrade the debt of Sirius XM, it also upgraded the company's probability of default rating from B1 to Ba3. Moody's noted:
The upgrades reflect our expectations for improved operating performance and credit metrics, including subscriber growth above previously indicated levels and enhanced financial flexibility due to its proposed refinancing resulting in near term debt reduction, extended maturities, and stronger coverage ratios.
Clearly this is good news for Sirius XM and its investors. It seems it is even better news for Liberty. During the Liberty conference call, CEO Greg Maffei said the following:
Our view is that Sirius is under leveraged and there's plenty of opportunity for share repurchases and other financial actions at the company which we deem ultimately positive. And being a shareholder - an increased shareholder - in Sirius is a good thing. There's a ton of liquidity at Sirius. There's not only borrowing capacity today; our anticipation is over the next several years they'll generate billions of dollars shielded by NOLs with decreasing leverage and the bulk of cap-ex necessary for the like having already been spent.
He later added, "We're probably more interested in seeing them re-lever and get the appropriate valuation at Sirius." If Maffei wants to see Sirius take on more debt and leverage up the balance sheet, the improved credit rating and its implication for lower interest rates should be welcome news. Is there a downside to the timing of the upgrade?
There will be a small price to pay for the upgrade. Recently, Sirius XM has been repurchasing some of its debt. The upgrade should result in the company's current debt increasing in value and the cost to make market repurchases somewhat more expensive.
In a previous article I discussed how Liberty might want to get some of its investment back in Sirius XM. There were two comments by Liberty's Maffei that addressed this specific issue. First, he noted that Liberty needed to spend a lot of money to get from 40% to 46.1% and would need to spend more to get to 51%. When discussing the 11% move from 40% to 51%, he said, "We would like to get the bait [?] back on the 11 points." Second, he said, "It's against our nature to spin out full basis cash." I take these two comments to indicate that at some point Liberty wants to sell the shares it needed to buy to take its ownership from 40% to 51%, with Sirius XM being the buyer of those shares.
Supporting this position is the Liberty announcement to spin Starz to Liberty shareholders. During the conference call it was stated that Starz would be drawing on its own credit facility and paying an expected $1.8 billion dividend to Liberty. However, without Starz, if Liberty is to spin its Sirius XM shares to Liberty shareholders, it would be a very scaled down Liberty. Liberty would own True Position, the Atlanta Braves and stakes in Live Nation (LYV), Barnes and Noble (BKS) and several other smaller equity investments.
It would appear that this leaves Liberty with few viable options. Either get a lot of cash back for the 11% of the Sirius XM stock purchases needed to get to 51%, receive a large dividend from Sirius XM, consolidate Sirius XM into Liberty or some combination.
The good news for Sirius XM has built all week long. It is probably even better news for Liberty. Liberty needs to acquire less than 5% of Sirius to get to a majority ownership position. They will want to recover that investment back at some point, and the easiest path may be to have Sirius XM take on substantial debt to return cash to Liberty.
The Moody's upgrade may have made taking on substantial new debt at Sirius XM that much easier.
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.