"It is precisely the reason for the existence of convertible debt instruments -- as an incentive for an otherwise borderline lender to make a loan."
Or as is often the case. Debt and a boat load of warrants! The other question you have to ask yourself is how would a potential 200 million investor create a hedge on their investment. The logical answer if the stock price were much higher would be to establish a substantial "short" position in the equity. Given price and the metrics of short interest, then I would argue that it would be difficult to establish an effective hedge. (Which anyone with 200 million sitting around these days is going to want on a issue like XM.)
When the agreement with GM was entered into, it probably should have been structured as LTD anyway, because clearly, the underlying costs relate to the long-term rather than the next few years.
I am not that familiar with the specifics GM agreement, but, do to it's terms. It appears to be another one of those "need to make a deal at almost any cost" type of deal. Maybe a deal made in order to secure subscriptions to an earlier round of financing?
Could happen this way. For me, I think I'm going to gamble a little more on this.
Yes, it is a gamble! Like I said, the fact that GM is converting to debt is a big warning sign that things may not turn out as planned! If they were not doing so, and just extending the payment period out a year or two. Then I would say the odds were a bit more in your favor.
After all, if FCF is indeed close at hand. And GM stood to make a tidy sum from it's current investment in XM, then simply extending the payment terms a couple of years would satisfy your "other lenders more approving of the near-term 200 million loan." If GM is going to commit to production numbers in 2003, then they will want to make sure that the service to support their production methodology will not be in Bankruptcy. The non-secure payment obligation conversion solidifies that GM will have somewhere around 250 Million in unsecured debt claims if they (XMSR) happens to come up with the 200 Million in near-term funding. If not, expect GM to press the payment issue and possibly withdraw production plans, or step in with DIP financing.
You are correct on this statement. "It isn't going to be long before we know..."
Best Regards,
PCSTEL |
