Boart Longyear Not Out Of The Woods

This story features BOART LONGYEAR GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BLY

-Brokers see equity issue still possible
-Concern as lenders gain upper hand
-How burdensome is the cost of debt?
 

By Eva Brocklehurst

Drilling services and product supplier, Boart Longyear ((BLY)) has restructured its debt. This reduces the near-term risk of a breach of covenants, but brokers contend the company is not out of the woods yet.

Boart Longyear will restructure by issuing US$300 million in US senior notes. Of these, US$260m are secured and US$40m unsecured. The notes will mature in 2018. Proceeds will pay down the $450m bank facility, which will reduce to US$150m with less onerous covenants. The new funding leaves the company with US$600m in senior notes and the US$150m revolving credit facility.

The lenders under the amended revolving credit facility will have first priority security interest in accounts receivable, inventories, cash and related assets. These lenders will have second priority interest in all other tangible and intangible assets. Additionally, under the amended revolving facility, the lenders will be able to restrict additional debt raising, spending, acquisitions and payment of dividends.

Citi's contention is that, with the company facing a multi-year downward cycle, net debt will remain elevated. This means an equity raising, or rights issue, cannot be ruled out further down the track. In the absence of asset sales, i.e. the products business, and an equity raising, net debt is likely to remain elevated until demand recovers. This is some time away, given the weak operating cashflow outlook and the drag on inventory because of declining exploration volumes. The broker forecasts net debt of $541m in 2013 and $490m in 2014 against $564m for the first half of 2013.

The company may be able to manage debt better with the revised covenants around liquidity (minimum $30m) and asset coverage but, in Credit Suisse's view, this will come at the price of increased control by lenders. The broker worries key lenders will have increased control over daily operations. The lenders are expected to keep the company on a very tight budget. Capex is expected to be reduced to a minimum until there is evidence of a cyclical recovery in exploration spending and that's not expected in the near term. The broker is also of the opinion that the reduction in the debt ceiling of $300m also leaves the company with few alternatives to an equity raising, if revised banking covenants were to be breached in the future.

What's the cost? That's Macquarie's question. At a minimum the broker estimates 9.0% on the new US notes. Citi has estimated 9.5%. This compares to the existing US unsecured notes at 7% and the current revolver at 250 basis points over LIBOR. Of note too, amendments to the revolver, which is in place until July 2016, are accompanied by restrictions on the company's ability to spend on capex and pay dividends. For Macquarie, net debt looks uncomfortably high for at least another 12-18 months. Timed with the debt restructure was news of competitors Major Drilling and Layne Christensen results. They're not pretty either. Revenues fell 54% and 41% respectively. This compares with Boart Longyear's 35% fall in revenue in the first half and Macquarie's forecasts for revenue to fall 37% over 2013.

All up, brokers think there's more deterioration in the outlook on the cards. Rig utilisation continued to fall in August and Citi notes it is currently in line with GFC lows. Moreover, there is further to go. BHP Billiton ((BHP)) and Rio Tinto ((RIO)) have pointed to lower exploration spending in FY14. Citi models Boart Longyear's drilling services volumes as down 30% in 2013 and 7% in 2014, with pricing falling 15% in 2013 and 5% in 2014. Deutsche Bank thinks the company's valuation is attractive on a longer-term view but remains very cautious, given the uncertainty around activity levels. 

The FNArena database reveals four Hold ratings and four Sell. Citi was a little more positive as a result of the debt deal, raising the recommendation to Neutral from Sell. The consensus price target is 50c, suggesting 2.1% upside to the last share price and inching up from 48c ahead of the debt raising. The range of price targets is from 36c (CIMB) to 72c (Deutsche Bank).

See also, Going Gets Tougher For Boart Longyear on August 27 2013
 

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