Relief But No Comfort For Boart Longyear

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

-Debt deal onerous
-Interest rate high
-Difficult time ahead
 

By Eva Brocklehurst?

Brokers were keen to get a handle on details of Boart Longyear's ((BLY)) new debt deal, as the drilling services company faced a multitude of concerns about covenant breaches and defaults. There was relief as the debt offering was finally put to bed but little comfort to be found in the outlook.

There's no changes to ratings. The FNArena database has four Hold and four Sell ratings with a consensus target price of 49c, suggesting 6.5% upside to the last share price.

The company priced US$300m of debt at an interest rate of 10%, at the top of, or slightly above, broker forecasts. Proceeds will pay down the US$450m bank facility. This then reduces to US$140m and has less onerous covenants attached. It removes the risk of a rights issue but the net debt is still elevated and the interest cover is tight. For Citi, this means an equity raising cannot be ruled out further afield. Macquarie notes additional security was required to get the debt offering underway. Suspicions that investors pushed back on the earlier proposal of a US$40m unsecured portion appear well founded. The amended debt offer is such that the full US$300m is secured by a first-priority lien on most of the assets, and a second-priority lien lies over accounts receivable, inventories, cash and related proceeds.

Citi forecasts net debt of US$541m in FY13 and US$490m in FY14 and also notes demand is still deteriorating as rig utilisation fell in August and is now around 50%, in line with the lows of the GFC. Moreover, utilisation has further to fall with BHP Billiton ((BHP)) and Rio Tinto ((RIO)) pointing to lower exploration spending in FY14. Citi expects volumes will be down 30% this year and 7% next year with pricing of services down 15% this year and 5% next year. Not a good look for revenue estimates.

Macquarie sees a balance sheet that remains stretched. The debt deal will remove the leverage covenant test so a breach has been averted but net debt and gearing are expected to remain severely high for at least another 12-18 months. Macquarie forecasts US$515m in net debt and a 4.4 times net debt to earnings at 31 December 2013, falling to US$427m and 4.0 times net debt to earnings by the end of FY14. This compares to domestic mining services peers which average net debt to earnings of 0.6 times.

The company will also sustain a substantial increase in net interest expense over the next few years at a time when earnings are likely to be subdued. Taking into account this increase in net interest, Macquarie calculates first half FY14 interest cover of 1.61 times against the new minimum of 1.55 times – not much head room. This debt refinancing leaves few alternatives to an equity raising if revised banking covenants were to be breached in the future, according to Credit Suisse. The reduction in head room leaves the company with US$140m of available liquidity under the amended facility. For sensitivity, the broker estimates a 32% FY14 EBITDA downgrade in the vicinity of US$40m to US$85m would trigger an interest covenant breach.

In fact, brokers agree that the debt problem will not go away until demand for drilling services recovers. From Credit Suisse's feedback that's not happening any time soon. Conditions have, if anything, deteriorated over the past three months and utilisation rates are expected to decline heading into the northern hemisphere winter. Financial stress and such conditions makes Credit Suisse nervous about the outlook.

UBS finds the new terms restrictive. It may provide a short-term solution to the balance sheet problems but the lenders have first priority over the assets and restrict the company's ability to incur further debt or spend. Moreover, the timing of the cyclical rebound in mining is difficult to predict. Credit Suisse is also concerned that capex is likely to be kept at an absolute minimum. Challenging is the key word brokers are using for the next year or so.

See also, Boart Longyear Not Out Of The Woods on September 16 2013
 

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