XM Completes Sale/Leaseback Transaction On XM-4

February 14, 2007

Last week we reported that there was speculation regarding a sale/leaseback of XM-4. The note was part of an analyst report written by James Dix of Deutsche Bank, who broke the story to the street. Today, XM announced that they have completed the transaction. The move will bolster liquidity for XM.

On February 13, 2007, we entered into a sale-leaseback transaction with respect to the transponders on our XM-4 satellite, which was launched in October 2006 and placed into service during December 2006. This transaction was the result of months of extensive negotiations and preparation, and follows the receipt of the XM-4 in-orbit test reports in January and the placement last week of additional insurance on the XM-4 satellite required in connection with the transaction. XM received net proceeds of $288.5 million from the transaction, of which $44 million (inclusive of interest) was used to retire outstanding mortgages on our real property and the remainder of which provides additional liquidity available for working capital and general corporate purposes.

The transaction achieved our dual objectives of monetizing the tax benefits of XM-4 satellite ownership and cost-effectively enhancing our liquidity. The sale-leaseback transaction completes the recapitalization plan which we commenced in April of last year and was specifically provided for in the bond and credit facility agreements closed in May 2006.

Summary of the Transaction. Under the sale-leaseback arrangement, we sold the XM-4 transponders to a trust owned by Satellite Leasing (702-4) LLC for $288.5 million, representing the fair market value based on an appraisal performed by satellite consulting and lease appraisal firms. The purchase price for the XM-4 transponders was financed with a $57.7 million investment by the equity owner of the lessor, or owner participant, and $230.8 million from the sale of 10% senior secured notes by the lessor.

The lease term is nine years with an early buy-out option in year five and a buy-out option at the end of the term. The lease has minimal amortization during the first half of the lease term and will be recorded as a capital lease on our balance sheet.

Our operating subsidiary, XM Satellite Radio Inc., is leasing the transponders from the lessor for a term of nine years pursuant to a lease agreement. These lease payment obligations, which are unconditional and guaranteed by the parent company, XM Satellite Radio Holdings Inc., are senior unsecured obligations and rank equally in right of payment with existing and future senior unsecured obligations. Principal and interest payments on the notes are senior secured obligations of the lessor. The notes issued by the lessor are secured by a lien on the transponders, the lessor’s security interest in the XM-4 satellite, and subject to certain exceptions, the rights of the lessor under the lease, including the rights to receive base rent and other amounts payable by us under the lease.

Throughout the term of the lease, at any time when XM is not investment grade, we will provide to the owner participant credit support sufficient to cover the stipulated loss value of the equity at that time. To provide this credit support at the present time, we defeased the existing mortgages on our headquarters and data center properties in Washington, D.C. and put into place new mortgage liens on those properties in favor of the owner participant.

We will have full operational control over the transponders for the lease term, absent default. We will continue to own the XM-4 satellite itself, subject to an obligation to sell the satellite to the lessor for a nominal sum in the event that we do not repurchase the transponders at the end of the term.

We have an early buyout option in year five and a buy-out right at the end of the lease term, each at prices representing the fair market value based on an appraisal performed by satellite consulting and lease appraisal firms. We have other rights to purchase the transponders or the equity interest in the lessor, including if the owner participant becomes affiliated with a major competitor of XM and in situations which might otherwise involve adverse tax or accounting consequences. We also have rights to cause the lessor to effect a refinancing of the notes, and any interest savings from the refinancing would result in reduced lease payments.

We can be required to repurchase the transponders upon the occurrence of specified events, including an event of loss of the satellite (subject to our right to substitute another satellite meeting equivalent or better value and functionality tests), changes in law that impose a material regulatory burden on the owner participant, changes of control similar to those of our outstanding 9.75% Senior Notes due 2014 and events resulting in the absence of another holder (other than XM and its affiliates) of FCC satellite radio licenses in the frequency bands that can be served by the XM-4 satellite. We have agreed to provide indemnities in the event the owner participant shall lose or not be able to take certain tax positions relating to the transaction.

Labels: deutsche bank, sale-leaseback, xm, xm-4

2/14/2007 11:02:00 AM

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4 Comments:

• Could someone explain this article in layman's terms and its implications. Thank you.

  By  Anonymous, at February 14, 2007 11:56 AM  




• XM "sold" their satellite, and then leased it back. They get the benefit of a fast cash infusion, but now pay interest on the satellite.

  By  SSG, at February 14, 2007 12:48 PM  




• Thank you for your explanation. Would this action be related to a merger move or some other action?

  By  Anonymous, at February 14, 2007 12:51 PM  




• I would not read very much into it other than XM trying to improve their cash and liquidity position. it could relate to a need for cash, to satisfy certain liquidity levels for other credit facilities, preparation for litigation settlements, better ability to get XM 5 launched, content , overhead, or just about anything else.
  
  XM has made treemendous efforts to better position their debt, cash and credit, and over the past year has made a number of financial moves.

  By  SSG, at February 14, 2007 1:13 PM  

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