Friday, April 21, 2006

XM Refinances Debt

April 21, 2006 8:50PM EST

Today after the market closed XM satellite radio filed paperwork with the SEC relating to debt refinancing. Satellite Standard Group (SSG) takes a look at the refinancing deal and breaks it down.

In simple terms, XM took on $800,000,000 worth of new debt and retired $447,000,000 of existing debt. The net on the transaction was the addition of about $353,000,000 on new debt. The deals finance $600,000,000 at a fixed rat of 9.75%. The remaining $200,000,000 is at a floating interest rate starting out at 9.6%. Interest expenses on the new debt should total about $78,000,000 per year (using 9.7% as a rate). Previously the old debt had payments of about $52,000,000 per year. The interest payments by XM have effectively gone up by $26,000,000 a year.

Of that $353,000,000 of new debt XM used $240,000,000 to prepay General Motors for fixed payment obligations that would have been due in 2007, 2008, and 2009. Previously those fixed payments would have totaled $320,000,000 and had no interest tied to them. So while the $240,000,000 is less than the $320,000,000 the prepayment money has been borrowed. If we assume a rate of 9.7% for the borrowed money, XM will pay $186,000,000 in interest over the 8 year period that the financing is in place. This brings the total GM obligation to $240,000,000 + $186,000,000= $426,000,000 instead of $320,000,000.

This prepayment to GM takes a short term burden of substantial payments off of XM's shoulders, and allows them to spread that cost over 8 years, rather than the coming 3 years. In effect, it will improve the cash flow for XM in 2007, 2008, and 2009 substantially. The balance sheet for 2006 will not look as nice, but going forward it can give XM some leverege. Under the previous deal, the payments to GM would have been made from cash. They are now financed. It would appear that this deal with GM included the fixed obligation payments only. It seems that XM will still have to pay GM subsidies, as well as a revenue share.

Also as part of the financing, XM picked up a $250,000,000 revolving credit facility. This is likely at a cost of 50 basis points, and thus would have a cost of about $1,000,000 per year.

In the short term, there may be some confusion relating to the deal, and how various costs will be accounted for. You can be sure that XM will field some questions relating to this at the quarterly Conference Call. On a long term basis, this refinancing will help XM with cash flow, and will make financial statements look much more healthy despite the added debt.

The wild card here remains the WCS spectrum, what XM has planned for it, and what kind of costs will be needed to roll out the use of it. If XM can utilize the spectrum without big costs, the street should be very receptive. If the costs are high, it will be a much harder sell with the street.

This piece was done using rounded numbers for simplicity. SSG is not a financial advisor. SSG fully encourages readers to do their own research, and consult a financial advisor prior to making any investment decisions.

The link to this write up is http://tinyurl.com/q4qzo

4/21/2006 08:46:00 PM

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