A lot of noise is being made these days by people regarding certain convertible debt that SIRIUS XM has coming due in 2009. I have no problem admitting that I for one, am one of those unsophisticated investors we’ve heard about lately. The truth is this whole convertible arbitrage thing hit me like a sucker punch to the side of the head, and I’m still trying to find out what the heck just happened!
Seems like a lot of people are becoming more sophisticated these days as they try to learn all they can about convertible arbitrage. I was reading over Sirius’ 10Q filed today. After hearing Mel on Cramer referring to converts coming due in 2009, I decided to look into it a bit deeper. I have seen message board posters claiming billions had to be repaid in 2009.
I did find 2 converts coming due in 2009. The first one is a total of $300,000.00 due in February 2009. On the grand scale this would seem like minutia. Also listed was $1.7 million in “aggregate principal amount of 8-3/4% Convertible Subordinated Notes due 2009?. These are not due until September. That’s a total of 2 million dollars. Not for nothing, but refinancing those notes should not be a problem. In fact they should just be paid off.
Not finding anything of real importance in Sirius’ filings, I headed over to the former XMSR filings. This is where the debt issue comes into play. XM has $400.0 million of 1.75% Convertible Senior Notes maturing. These were announced at the end on December of 2002. I have been unable to ascertain whether they are due in January of 2009 or December of 2009. For arguments sake, let us assume that they are due this January.
Also of interest is 187.5 million due on a revolving credit facility in 2009, again I was unable to find in the mountains of press releases any firm due date. This is probably the bank issue Mel made reference to in his interview. So now we’ve gone from billions due, to just under 590 million that does not have to be paid off, but refinanced.
Credit markets exist for a reason. They add liquidity and of themselves there is nothing wrong with using them….especially when the terms are beneficial to companies. SIRIUS XM now has an annual projected revenue stream of 2.4 billion dollars. When these deals were originally inked there was no guarantee that Satellite Radio would even be a viable business.
The reason I am bringing this up is because a lot of boiler room message board groupies are using the word “converts” as a scare tactic. These convertibles were issued many years ago, and shorted against back in 2002 -2003. The shares were already shorted, and as Jim Cramer pointed out today, is customary practice.
SIRIUS XM should not have a problem refinancing any of this debt. So what does it mean to shareholders? It should mean nothing! That’s right, absolutely NOTHING! As the old converts are paid off, the existing short positions are covered, and the shares returned. The replacing converts (assuming this is the debt instrument chosen at that time) short against the new. The net effect is a zero-sum-game. The new shares used a few weeks ago for arbitrage purposes was for new debt. Refinancing these old convertibles, as Martha Stewart would say, is a good thing, and shouldn’t result in any dilution of shares. In the end, it will not matter if 600 million needs refinancing or 6 billion.
Position: Long SIRI 
