Bristow Group’s capital markets fly-by last week cleared out near-term maturities and added cash liquidity as the helicopter operator seeks to ride out the downturn in oil & gas drilling activity, according to multiple sources tracking the company.

But the secured offering – an upsized USD 350m 8.75% first lien note due 2023 – also adds several turns of leverage to Bristow’s already highly-levered balance sheet. Moreover, the deal’s expensive coupon is expected to deepen Bristow’s near-term negative cash flow trend as it banks on an oil recovery, the sources continued.

Proceeds from the bonds paid off USD 52m due on a 2019 term loan and USD 13m in revolver borrowings, as well as provided USD 275m in cash for the balance sheet. The deal was just the latest in Bristow’s efforts to manage liabilities and keep it from going the way of fellow aviation service providers CHC Helicopters and Erickson Inc. Both of those companies filed for bankruptcy in 2016 as oil producers stalled drilling programs and slashed exploration budgets.

In December, for instance, Bristow raised a USD 144m 4.5% convertible note due 2023, proceeds of which paid off a portion of its term loan and was allocated for general corporate purposes. And in February, the borrower inked secured equipment financings totaling USD 200m with Macquarie Bank — also used to pay down debt and add liquidity – representing the third such first lien equipment financing deal since late 2016.

In the meantime, Bristow’s cap structure has rallied. Its USD 400m 6.25% senior unsecured notes due 2022 – now the nearest maturity – traded yesterday at 85.5 to yield 10.27%, up from trades in the low 60s yielding over 15% in August, MarketAxess shows. Bristow’s equity trades today at USD 15 per share and a USD 530m market cap, up over 100% from USD 7.44 per share in August.

The new notes traded today at 101.68 yielding 8.245%, compared to the issue price of 99 for a 9% yield, according to MarketAxess.

Pro forma last week’s deal, Bristow is levered 11.63x through its first lien debt, when taking LTM adjusted EBITDA of USD 86m and first lien debt of USD 1.002bn. In addition to the 8.75% notes, Bristow’s first lien debt consists of five equipment financings totaling USD 652.64m.

On a gross basis, the operator is levered 16.7x taking the USD 1.44bn of total debt, while net of USD 344m in pro forma cash, leverage is around 12.65x.

Market takeoff

Bristow’s overall reliance on the oil & gas industry, specifically offshore drilling, could prove either troublesome or beneficial for the company, the sources noted. Since the new deal will add roughly USD 30m of interest expense, it’s expected to continue to fuel Bristow’s near-term cash burn, especially absent an uptick in drilling activity, they added.

At deal close, Bristow’s liquidity consisted of about USD 344m of cash and USD 75m of availability on a planned ABL facility.

“The general consensus is that they’ve hit a trough this year and next year and they have a lot of hurdles to face, but this bond gave them a bridge over the new two years,” said the first buysider. “There is positive sentiment for the company to turn around. The market is banking on some growth margins over the next year for Bristow and for offshore drilling as a whole.”

Still, many believe Bristow needs much higher oil prices in order for offshore drilling activity to increase to a point where the company can put its idle aircraft back to work.

“I don’t see a huge acceleration in offshore drilling on the horizon,” said a second buysider. “You could see some small pick-up, but to really see a ramp-up you would need prices to get back into the USD 80 – USD 100 per barrel area.”

Several sources estimate that EBITDA for fiscal 2019 ending next March will increase YoY by around 20%, implying a bottom line of USD 100m or more. That would lead to cash burn of around USD 50m-USD 60m, based on interest expense of USD 105m and around USD 50m in capital expenditure.

With last week’s deal, “Bristow is essentially taking free liquidity in the form of a revolver and replacing it with 9% liquidity,” noted the first buysider. “If anything, it would hasten a bankruptcy.”

Even so, Bristow management has been focused on cutting costs, largely through returning leased but unused aircraft to lessors when the leases expire, the sources noted. In fiscal 3Q ending 31 December, the company returned three Airbus H225 aircraft, and was planning to return an additional five aircraft before the end of the fiscal year, according to comments on the 9 February investor call.

“The incremental cost of this new debt is little compared to what it gives the company in terms of financial flexibility and its ability to focus on optimizing operations,” said a bondholder.

But deferring capex will likely result in heightened cash needs by 2020, heightening a potential liquidity crunch if oil prices have not rebounded by then, said three of the sources.

Collateral coverage

Despite the operational headwinds, when considering the deal, investors pointed positively to the yieldy coupon as well as ostensibly strong collateral coverage at the first lien level.

The collateral package for the secured bond included 77 aircraft – five for search and rescue purposes – appraised at USD 525m, according to two sources familiar with the deal. The 77 aircraft consist of one AgustaWestland 139, 16 Airbus Helicopters (H225), 15 Bell Helicopters B407, 31 Sikorsky S-76C++s, five Sikorsky S-76Ds and nine Sikorsky S-92As. An additional USD 197m was also included in the package as non-aircraft collateral value, for a total of USD 722.9m.

“It’s a lot of leverage, but also a lot of collateral,” noted a bondholder.

However, appraised aircraft value doesn’t necessarily translate to market value, the sources noted, and the company’s pre-existing first lien debt already has liens on Bristow’s higher quality assets. Additionally, 27 of the company’s Airbus Helicopters included as collateral have been idled, the sources added.

Bristow representatives did not respond to requests for comment.

2018 Debtwire