finds itself in a tough financial position with little light at the end of the tunnel amid concerns over the satellite radio provider's ability to repay or refinance a bevy of debt obligations due next year.
That news is undoubtedly hard for shareholders to swallow, as they've already seen the value of Sirius XM's stock tumble more than 65% since the merger between Sirius and XM was completed in late July.
Shares have closed under $1 for more than a week now, opening the door to the possibility that a
delisting notice -- which gives the company six months to shape up or ship out -- could soon follow if the stock were to remain at these levels for another three weeks.
Even though the company will likely continue to operate its satellite radio programming as shares spiral further and further towards zero value, Sirius XM shareholders will be the ones left holding the bag.
Sirius XM has the unenviable task of handling more than $3 billion in debt, with just more than $1 billion of that pie coming due in 2009.
Nearly five years ago, Sirius issued $300 million in convertible senior notes that will represent the first milestone debt repayment when they mature in February 2009. The company has given no indication how it will meet that obligation.
Beyond that, Sirius XM has hopes of extending the maturities of another $350 million in debt due in May, and it also expects to refinance the $400 million in XM convertible debt that comes due in December. CEO Mel Karmazin said during the company's last conference call that he expects that Sirius will break even by that point, which would help with the refinancing.
Although both Sirius and XM functioned historically with negative cash flow, a combined Sirius XM will certainly not have enough money on hand to manage its debt until it has a positive cash flow.
"Standard & Poor's believes that the company's access to the debt markets will be predicated on the financial markets' stability and the company's growth and execution," writes Hal Diamond, credit analyst with S&P RatingsDirect, in a research note. "Ongoing substantial liquid resources are critical because access to the public debt and equity markets is unpredictable."
During a tech conference last week, Karmazin reassured investors that Sirius XM would eventually be free cash flow positive, but he also went as far as to announce he has been in talks with several lenders in hopes of securing a refinancing deal for all of that debt.
Since then though, the financial landscape has been dramatically altered.
filed for Chapter 11 bankruptcy protection Monday after both the U.S. government and the private sector refused to bail out the investment bank.
On top of that,
was forced to sell itself to
Bank of America
The last two true U.S. investment banks,
, will likely scrutinize any lending or underwriting from here on out, and even foreign banks like
will likely find it hard to lend a helping hand to Sirius XM.
Needless to say, it may prove to be extremely difficult for Sirius XM to secure $1.05 billion to get these repayments financed. Combine a credit rating of CCC+, or junk status, with its situation classified as "developing" by Standard & Poor's, and it becomes more and more unlikely Sirius XM will function the way many expected it to post-merger.
"We could lower the ratings if sizable 2009 maturities are not addressed and if the company cannot progress rapidly toward consistent positive discretionary cash flow," warns S&P's Diamond. "Until Sirius can generate positive discretionary cash flow, liquidity will rely on its liquid asset balances and access to the capital markets."
It's certainly not a shock that Sirius XM would eventually find itself in this position, considering the large amount of attention focused on its outstanding debt since before the merger.
As a standalone company, XM considered itself to be fully funded, but in May it disclosed that it will access a $150 million credit facility provided by
. That credit facility matures at the end of 2009 and can be used only for payments to GM. The company started utilizing the GM credit facility in June, a month before its merger with Sirius.
While Sirius XM could continue to tap the GM credit facilities into next year, the inability to find additional liquidity remains a long-term issue.
"We have certain concerns about Sirius XM's cash balance in 2009 in light of the GM debt facility going away, along with Sirius XM's satellite capital expenditure commitments of $120 million, and the refinancing of another $1.05 billion of debt," said April Horace, analyst with Janco Partners, in a research note. "In light of the credit markets, refinancing the debt could be difficult or unachievable."
And while Karmazin has promised that Sirius XM would be free cash flow positive sometime in the future, the costs keep mounting for the company. In addition to debt obligations, Sirius XM is hoping to launch a new satellite in the second quarter of 2009 and another in the fourth quarter of 2010, which will likely push Sirius XM's cash position much lower.
"Our current simplified forecast has Sirius XM's cash balance excluding any changes in working capital ... could decline to $90 million, which seems awfully low, especially given that we have not factored in any severance payment, merger costs, or banking costs," Horace says.
One dire prospect for shareholders is that Sirius XM will further dilute shares through future public offerings. On the eve of announcing the closing of its merger to XM, Sirius sold nearly $375 million in common stock in a fixed-price public offering, with up to another $65 million more to come later concurrently with a private offering by XM.
Thus, on a day when investors should have been celebrating the completion of the long-awaited merger, they were instead licking wounds brought on by the share dilution.
For now, Sirius XM is continuing to focus on cutting costs through synergies with the expectation it will lead to positive free cash flow. The company already is anticipating $150 million in media and advertising savings in 2009, although many analysts view that move as risky as the company needs to re-establish strength in its retail business, which has suffered as Sirius XM hams shifted attention to automotive installations.
"Sirius stated that the majority of the savings were attributable to a reduction in headcount and duplicative functions," says Horace. "We think the riskiest cost synergy that Sirius has planned for is in the media and advertising category. We have always had concerns about this particular category."
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