Balance Sheets 101: Who Made the Grade

Editor's note: Last earnings season, Scott Rothbort graded several corporate balance sheets. As the current earnings season starts to wind down, Rothbort evaluates a new set of balance sheets, plus takes an updated look at Sirius Satellite Radio's balance sheet.

Sirius Passed -- Barely

Let's start off by taking a second look at Sirius Satellite Radio (SIRI Quote), which recently merged with XM Satellite Radio (XMSR Quote).

Last earnings season, I gave this combination an incomplete grade. The merger of these two companies was a long and arduous process. Missed opportunities -- especially for the new 2009 automobile production cycle -- and uncertainty over the merger have left the combined company in a capital and cash shortage. These companies have burned a huge amount of cash, while still carrying large amounts of debt. As a result, this week, Sirius issued hundreds of millions of dollars of stock and sold hundreds of millions of convertible debt in a private placement offering.

The motivation for the merger was to expand offerings to consumers and save about $400 million in 2009. The hopes are that the savings will increase earnings and pay down debt in the future.

However, this multibillion-dollar debt-riddled company is going to have an uphill battle to survive in its current form. The cost savings will go a long way to helping, but the interest on the low-graded debt is going to handcuff the company, leaving very little margin for error or operational shortfalls. Continued economic weakness could result in lost subscribers or failure to add new subscribers.

My prediction is that Sirius will have to reorganize in the future in a Charter 11 bankruptcy that would result in wiping out the shareholders and leaving the company to its creditors. Thus, owning Sirius debt may be a better investment than owning the equity.

Sirius' Balance Sheet Grade: D- (but at risk of failing).