Sirius XM: Bankruptcy Threat's Real

Sirius XM ( SIRI) said it has exchanged some of its debt due in December, but the satellite radio provider acknowledged Friday that if more transactions aren't successfully completed it may be forced to file for bankruptcy protection as early as next week.

Sirius XM said in a press release that it has exchanged $172.5 million of existing convertible senior notes due in December for new senior secured notes now due in June 2011. Before the transaction, $400 million of the senior notes were set to mature in December, leaving approximately $227.5 million in senior notes outstanding.

The company said the exchange is part of a "larger restructuring effort," which has created a whirlwind of speculation in previous days about Sirius XM's viability. Sirius XM confirmed it was in discussions with other parties regarding transactions that could refinance some of the company's and its subsidiaries' debt.

"These transactions may not be successfully consummated," the company said in the release. "If these transactions are not consummated, it may be forced to file for bankruptcy protection as early as February 17, 2009."

With few days remaining until a chunk of the company's approximately $3.2 billion in debt will come due, Sirius XM is in a very tough spot. While staring down a potential bankruptcy protection deadline, Sirius XM and its CEO Mel Karmazin has been working to thwart an attempt by EchoStar ( SATS) and its CEO Charles Ergen to take control of the company.

EchoStar, which sells set-top boxes and was the former parent of Dish Network ( DISH), has accumulated part of a $300 million tranche of Sirius XM debt set to mature Tuesday.

Ergen has reportedly offered to restructure Sirius XM's debt and inject several hundred million dollars into the company in return for control. Sirius XM was approached with the offer late in 2008 and declined, although the proposal is believed to remain on the table.

The Wall Street Journal noted Friday that the gap between what Ergen has offered and Sirius has asked for has narrowed, but the parties haven't reached agreement yet on other, nonfinancial issues. Ergen is prepared to let Karmazin retain his position, the newspaper reports.

Also on the table is a potential capital injection from billionaire John Malone and Liberty Media ( LINTA). Reports surfaced earlier this week that Sirius XM and Liberty, which controls DirecTV ( DTV), were in talks.

According to a Reuters report, discussions between Sirius XM and Liberty are "friendly" and do not include an equity stake, according to sources close to the matter. Any possible agreement could include a loan to Sirius XM, paying off its debt, or assuming the debt obligations.

Shares of Sirius XM were lately up 30% to 11 cents a share, although the stock is still down more than 95% since the July merger between Sirius and XM Satellite Radio. Investors appear to be holding out hope that a refinancing of the debt due on Feb. 17 will keep the company from filing for Chapter 11 bankruptcy protection.

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