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