Moody’s Investors Service has upgraded several of its credit ratings for Sirius XM Radio. The satellite radio company has approximately $2.5 billion in debt rated by Moody’s.
Moody’s upgraded Sirius XM’s Corporate Family Rating (CFR) to B2 from B3 and Probability of Default Rating (PDR) to B1 from B2. Associated debt ratings were upgraded. “The upgrades reflect the company’s increasing subscriber base, improved operating performance, and recent debt reductions,” Moody’s said. The speculative-grade liquidity rating is unchanged at SGL-2. The rating outlook is stable.
“Sirius’ B2 corporate family rating reflects the company’s high leverage of 6.0x debt-to-EBITDA as of March 31, 2011 (including Moody’s standard adjustments), which should improve to less than 5.4x by year end due primarily to EBITDA growth. Based on Moody’s forecasts, we expect free cash flow will increase to more than $270 million in 2011 (or more than 8% of debt balances) driven by subscriber growth as the economy and automotive sales recover in addition to reduced capital spending,” the ratings agency said.
Moody’s noted that subscribers have grown to 20.6 million as of March 2011 from 18.8 million at year end 2009 despite high churn in the subscriber base and increasing competition from advertising supported radio services (Pandora) and Internet radio programs (iheartradio) delivered on hand held devices and automotive OEM-factory installed peripheral equipment. “Elevated capital spending on the construction and launch of one satellite limits free cash flow generation in 2011; however, we expect capital spending to decrease significantly after this year due to the absence of expenditures related to the planned construction of new satellites until after the first half of 2015,” the ratings update said.
“Although Sirius’ debt-to-EBITDA leverage is high, last year’s refinancing of near term maturities and recent repurchase of $205 million of notes provide some flexibility to execute its growth plan, reduce leverage and address 2013 maturities,” Moody’s said. The new and previous ratings are all in the speculative grade (junk bond) area.
The ratings advisory is not without warnings. “Over the long term, we expect heightened competition from advertising supported services and from much lower cost Internet radio offerings; however, Sirius’ ability to generate significant levels of free cash flow provides for continued debt reduction and an increased likelihood of refinancing 2013 maturities,” Moody’s said.
“We believe Sirius needs to reduce leverage to provide financial cushion for the eventual funding of the next cycle of satellite replacements as well as to continue investing in programming, marketing, and introducing new services to maintain its market share against heightened competition. The rating upgrades incorporate our view that leverage and free cash flow ratios will improve over the next 12 to 18 months, consistent with management’s 3.0x target for debt-to-EBITDA (company defined, or an estimated 3.5x including Moody’s standard adjustments),” stated Carl Salas, a Moody’s Vice President and Senior Analyst.
The stable outlook reflects Moody’s expectation for improving free cash flow-to debt ratios and recent actions by Sirius to reduce debt balances.
“We continue to expect annual sales of new automobiles will increase over the near term, above the estimated 11.6 million of light vehicles delivered in 2010, despite reduced shipments from Japanese car manufacturers due to quake-related shutdowns. Given that Sirius equipment is installed in the majority of new automobiles being sold in the US, more new vehicles enhance the potential subscriber base,” added Salas.
Here are the actions taken by Moody’s:
..Issuer: Sirius XM Radio Inc.
..Corporate Family Rating, Upgraded to B2 from B3
..Probability of Default Rating, Upgraded to B1 from B2
.$257 million Senior Secured Notes due 2015, upgraded to Ba2, LGD 2 — 10% from Ba3, LGD 2 — 12%
.$800 million Senior Notes due 2015, upgraded to B2, LGD 4 — 64% from B3, LGD 4 — 65%
.$700 million Senior Notes due 2018, upgraded to B2, LGD 4 — 64% from B3, LGD 4 — 65%
.$778.5 million Senior Notes due 2013, upgraded to B2, LGD 4 — 64% from B3, LGD 4 — 65%
….Speculative Grade Liquidity Rating, SGL-2
RBR-TVBR observation: It’s all about the balance sheet. Mel Karmazin has done a great job of getting it into shape.