In February, two leading satellite operators struggling with their debt loads in an unforgiving market did very tough deals to put off maturity on their debt. Notwithstanding good brands, incumbent status, strong management and high-quality services, the leverage on which these companies were built limits their room to maneuver, their potential growth and return on investment no matter how sound their underlying business and management.

On Feb. 17, satellite radio broadcaster Sirius XM Radio announced a package of $530 million in loan commitments by Liberty Media. An initial tranche of $280 million was to be used to pay off $175 million in 2.5 percent convertible notes due Feb. 17. The remainder of the package consists of an offer to purchase up to $100 million in other outstanding debt and to lend directly to Sirius XM an additional $150 million. The loans are secured by Sirius XM’s assets, have an interest rate of 15 percent and mature at the end of 2012. After the second loan, Sirius XM will issue preferred stock to Liberty convertible into 40 percent of Sirius XM’s equity. Liberty Chairman John Malone and CEO Greg Maffei will take seats on Sirius XM’s board, Sirius XM CEO Mel Karmazin remains in place and Liberty agreed to a standstill not to acquire more than 49.9 percent of Sirius XM’s common stock for three years.

Liberty, which controls satellite television broadcaster DirecTV, emerged as a white knight for Sirius XM following news that DirecTV competitor EchoStar had purchased about $375 million of Sirius XM’s total $3.3 billion in debt, of which about a third is due to mature this year. The acquisitions of Sirius XM debt by EchoStar from hedge funds and other creditors presumably were made as a prelude to a takeover attempt — a so-called "loan to own" play. Among the debt tranches held by EchoStar were most of the $175 million notes due on Feb. 17. EchoStar’s ability to force and accept an event of default should Sirius XM be unable to make payment likely would have forced a bankruptcy filing and gave EchoStar leverage over Sirius XM, which has seen its stock fall 99 percent since the July merger of its predecessor companies, trading today at a fraction of a dollar. EchoStar reportedly offered to restructure the $375 million it acquired and inject $500 million in new capital into Sirius XM in exchange for a controlling interest — and a probable change in management.

Meanwhile, on Feb. 12, fixed satellite service operator Intelsat closed its cash tender offer to purchase up to $375 million of its outstanding 7.625 percent senior notes due in 2012 and 6.5 percent senior notes due in 2013. The original offer, made in January, was for up to $200 million of the notes. A modified "Dutch Auction" set a bid range of $717.50-$817.50 per $1000 principal amount for the 7.625 percent notes, 19 percent of which at closing tendered for $787.50, and $635-$735 for the 6.5 percent notes, 49.5 percent of which tendered for $705 — in each case 70 percent up the bid range. To fund the purchase of notes tendered, Intelsat issued new 8.875 percent senior notes due in 2015 at an issue price of 88.5 percent per $1000 principal. Intelsat cited the pre-tender availability of the notes at an up to 60 percent discount from principal, but given that the tenders predictably were well above that and that the transaction at its core exchanged the lower rate notes due in 2012 and 2013 for higher rate ones due in 2015, the tender clearly was motivated substantially by the two- and three-year extensions on maturity.

These moves to delay debt maturity payments at great cost represent a credit crisis era hangover from the high leverage-low interest rate binge of the early years of the decade. A strapped consumer would recognize it as the equivalent of using a high-interest credit card to pay off the balance of a lower rate one, but in the corporate world we still call it "restructuring." Sirius XM and Intelsat are satellite industry mainstays, not marginal players. However, continuing to build the debt castle will itself impede growth and an ultimate restructuring of debt into equity. The companies were built and their debts incurred in a very different environment from that in which those debts are now coming due.

Owen D. Kurtin is a founder and principal of private investment firm The Vinland Group LLC and a practising attorney in New York City. He may be reached by e-mail at [email protected].