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Sirius XM Delays Bankruptcy with New Loan

Last week I wrote that if Sirius XM [SIRI] died, no one would miss it. Some readers said they agreed that a better product would rise from XM's ashes, and others said they liked satellite radio just the way it is. Well, the latter camp will be happy to know that Sirius XM pulled down an investment today that should keep the company in the black 'til the summer.

Liberty Media, the parent of DirecTV [DTV], was the financial savior, extending a $530 million loan to SIRI so that the company might pay off a $175 million loan that is due today. For its troubles, Liberty will get 40% of Sirius XM's common stock and two spots on the company's board. Those spots are expected to go to Liberty's Chairman and CEO, John Malone and Greg Maffei respectively. The interest rate on the loan is 15%, and it comes due in December of 2012. You can read the SEC filings here.

But SIRI has another round of debt coming due in May: A whopping $350 million of it. Liberty has said that it will provide a maximum of $630 million in total loans, to be payed out incrementally. It will get $250 million today, to cover the loan that is maturing plus operating expenses. That leaves $380 million left in total loans from Liberty, that will barely cover May's maturing debt. But Sirius XM is badly leveraged by a total of $3.2 billion. Isn't it quixotic to think that a measly $630 million is going to put a dent in that kind of debt?

According to the Washington Post, a bankruptcy filing for SIRI would have almost certainly meant the ouster of its current CEO, Mel Karmazin, who led Sirius into its ill-fated merger with XM Radio last July. Thanks to today's deal, Karmazin gets to keep his job; all he has to do now is take a company with $2 billion in annual revenue and get it to turn a profit—something it's never done before.

So what happens once May passes? Something will give; Howard Sterns $100 million per annum contract needs paying, and servicing a body of 2 million subscribers generates serious overhead. And since most of SIRI's new business comes from new auto sales—which are at a stand-still—the company can't grow its subscriber base even if it revises its products.

As I said last week, the best solution for Sirius XM might be a structured bankruptcy deal that would allow another media company (or a PE chop shop) to rebuild SIRI into a new, useful product with a more versatile and less costly business model. But that would mean Karmazin would have to let go of the reins—something he seems to be avoiding at all costs.