Sirius (SIRI) plans to refinance debt...and more

| About: Sirius XM (SIRI)
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Sirius Satellite Radio (ticker: SIRI) announced that it plans to sell $250M worth of Senior Notes due 2015 to retire its 15% notes due 2007 and 14.5% notes due in 2009.

The press release makes two points:

  1. That SIRI has sufficient cash to fund operations until it reaches break-even in 2007
  2. That the proceeds of this offering are being used to refinance high cost debt and for 'general corporate purposes'.

While at first it appears as if SIRI is refinancing its high cost debt, only $63M of the proceeds are being used to retire existing debt.  Below is a list of SIRI's debt balances (book values shown).  As shown
below, only a small portion of its debt is being refinanced.

  • 3.25% convertible notes due 2011: $230M
  • 2.50% convertible notes due 2009: $300M
  • 3.50% convertible notes due 2008: $67M
  • 8.75% convertible subordinated notes: $2M
  • 14.5% senior secured notes: $28M
  • 15.0% senior secured notes: $29M

In fact, SIRI doesn't have much high cost debt left on its balance sheet after its restructuring in 2003.  Here's a quote from SIRI's recently filed 10-K:

In 2003, we also restructured our debt and
equity capitalization, resulting in the elimination of 91% of our then
outstanding debt. The increase in overall liquidity and reduction of
the average interest rate on our outstanding debt from 12.6% prior to
the restructuring to 4.0% at December 31, 2004 has better positioned us
to meet our business plan.

A quick calculation reveal that SIRI is actually increasing its interest expense with this offering:

Current interest expense of debt being retired:
$28M of 14.5% debt: $4.06M
$29M of 15.0% debt: $4.35M
Total interest expense: $8.41M

New interest expense of debt being issued (assuming 4.0% interest rate):

$250M of 4.0% debt: $10.0M

Quick comments: Replacing high cost debt with lower cost debt is a great idea but this offering is all about funding SIRI's money losing operations.  SIRI had negative free cash flow of 363M in 2004 and 306M in 2003.  Despite SIRI's assertion that it can fund itself until break-even in 2007, the proceeds of this offering make a nice cushion...just in case it can't.