Palm Feeling the Pinch of Rising Commercial Loan Rates

(MoneyWatch)  The crisis of confidence on Wall Street is pushing up costs of variable-interest commercial loans, many of which are pegged to the London Interbank Offered Rate (LIBOR). Handset maker Palm Inc., which has invested more than 12 percent of its sales in R&D in each of the last two years, or about $392 million, to supplant its aging Centro smartphones with new high-end, business Treo products, now has to navigate higher borrowing costs as it attempts to re-establish itself as a leading innovator of mobile devices. As of August 31, 2008, $397 million of variable-rate indebtedness was outstanding, according to its first-quarter 2009 10-Q filing:

• "In October 2007, Palm entered into a credit agreement with JPMorgan Chase Bank, N.A. and Morgan Stanley Senior Funding, Inc., or the Credit Agreement, which governs a senior secured term loan in the aggregate principal amount of $400.0 million, or the Term Loan."
• "The Term Loan matures in April 2014, and bears interest at Palm's election at 1-, 2-, 3-, or 6-month LIBOR plus 3.50 percent. As of August 31, 2008, the interest rate was based on 1-month LIBOR plus 3.50%, or 5.97%. The principal is payable at 1% of the original balance per annum for the first five and a half years in equal quarterly installments, beginning on December 31, 2007. The remaining principal amount is payable in quarterly installments during the final year preceding the maturity."

Palm leaders have bet heavily that new products and a new operating system platform can retake lost market share from Blackberry and iPhone. In the first quarter 2009, Palm paid $6.9 million, or 1.9% of sales, on its interest obligation. Looking ahead, Palm will be paying much more in borrowing costs: a hypothetical 100 basis point rise in LIBOR rate would result in an increase in interest expense of approximately $1.0 million each year for every $100 million of outstanding borrowings under its Credit Agreement. Last week, the one-month LIBOR rate closed at 3.93 percent, or an increase of 146 basis points since August 31, which means Palm's annual debt-service could jump an additional $6 million in 2009.

On a whole, with cash on-hand of approximately $248 million, Palm should be able to weather the current credit storm -- assuming potential customers do not close their wallets to mobile phone purchases.

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This post first appeared in BNET's 10-Q Detective.