Basic Energy recap deal faces heightened scrutiny as high leverage, cyclicality weigh on investors

Basic Energy is struggling to entice investors into participating in its first lien recap deal amid weak oil & gas sector sentiment and concerns about the oilfield servicer’s high pro forma leverage, according to four sources tracking the deal.

Potential investors also took issue with the borrower’s exposure to the highly cyclical oil pressure pumping business, as well as the deal’s allowance of additional pari passu first lien debt, the sources continued.

“I think people might like it because it’s first lien, but this business tends to be very cyclical,” said a buysider tracking the deal. “They were doing negative EBITDA just a few quarters ago.”

Whispers for the BofA Merrill Lynch-led USD 300m first lien bond due 2023 circulated in the 9.25% – 9.5% range, with pricing targeted for tomorrow, the sources noted. Proceeds will take out Basic’s pre-petition USD 162.5m 13.5% first lien term loan due 2021 – as well as a USD 26.6m repayment penalty – pay down the USD 64m outstanding on its revolver, and add cash to its balance sheet.

Basic raised the USD 165m term loan in early 2016 from Riverstone Energy and West Street Capital as it attempted to bridge the downturn in onshore oil & gas drilling activity. The borrower eventually filed for Chapter 11 later that year, handing over equity to holders of its pre-petition USD 775m of unsecured notes and reinstating the term loan.

Notably, the existing term loan has a USD 25m minimum cash and cash equivalents covenant which, given Basic’s cash burn trend, it could be at risk of violating in 1H18, two of the sources noted. As of 31 December, the borrower had just USD 50m of liquidity, split between USD 38.5m of cash and USD 12m of availability on its revolver, filings show.

Pro forma for the deal, however, Basic’s liquidity will climb to USD 153m, consisting of USD 78m of cash and USD 75m of availability on an ABL facility, net of letters of credit.

Leverage, meanwhile, will stack up at 6.7x on a gross basis, taking USD 400m of pro forma debt – including USD 100m of capital leases – and USD 59m of LTM adjusted EBITDA as of 31 December, the sources noted.

Under pressure

Basic provides a range of services to oil & gas drillers across the US, and divides its operating segments into four categories: completion and remedial services, well servicing, water logistics, and contract drilling.

In 2017, the completion and remedial services segment, which focuses mostly on pumping, cementing, and fracturing, accounted for 50% of revenues. The well servicing and water logistics businesses each accounted for 24% of revenues, respectively, while the contract drilling segment contributed just 2% of revenues, filings show.

In 2018, consensus estimates show adjusted EBITDA jumping to USD 150m, which, when taking USD 30m for interest expense and USD 95m for budgeted capex, leads to cash generation of USD 25m, the sources noted.

“The pressure pumping business looks pretty good right now, but you have these servicers building up horsepower, so what happens to pricing?” said a second buysider. “If you spin it forward, it looks ok. But anyone looking at this deal has to know that if the market turns, margins can go to zero again.”

As such, some potential investors more conservatively estimated 2018 adjusted EBITDA closer to the USD 100m area, based on annualizing the 4Q17 figure of USD 22.4m and allowing for a slight uptick. In that case, Basic would burn USD 25m of cash taking the same estimates for USD 30m of interest expense and USD 95m of budgeted capex.

“The problem with service providers to the energy sector is that they’re completely dependent on how the oil & gas industry does,” said a third buysider. While the US onshore rig count has climbed to 963 compared to 734 last year — according to data from Baker Hughes — concerns have proliferated that activity could slow down later this year, the sources noted.

With respect to Basic, adding to investor reluctance is the fact that the company would have roughly USD 125m of further priority lien capacity that can be secured by the same collateral as the first lien notes, the sources said. An additional USD 80m of debt in excess of the commitments under the ABL could be secured by assets that do not secure the notes, the sources said, citing language in the offering memorandum.

“You don’t want them to dilute you down with a bad acquisition that doesn’t provide any value,” said one of the buysiders.

The company and BofA did not respond to requests for comment.

2018 Debtwire

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