Apergy aims for trough-proof capital structure, investors gobble up bonds backing spin-off

Apergy priced its inaugural high yield bond late yesterday, sewing up the deal tight to the price whispers that circulated earlier this week, said two sources following the deal. Investors pounced on bonds backing the conservatively levered oilfield services provider, whose standalone EBITDA and free cash flow, pro forma the new capital structure, would remain in positive territory if the devastating 2016 cyclical low point reoccurred, according to three buyside sources.

Industrial conglomerate Dover announced in December plans to spin off its wellsite services business into a new publicly traded company, under pressure from activist investor Daniel Loeb of Third Point to increase shareholder value. Apergy, the new spun-off unit, will make a USD 700m distribution back to Dover to fund the separation, financed by a USD 415m term loan and USD 300m senior unsecured note.

JPMorgan serves as the lead for both components of the deal. The BB/Ba1 rated seven-year term loan was upsized from USD 365m and pricing was tightened to Libor+ 250bps (0% floor) at 99.75, from initial guidance of L+ 275bps-300bps (0% floor) at 99.5 OID.

The B/B1 eight-year USD 300m bonds priced at 6.375% and par, tight to initial whispers in the 6.75%-7% area, sources said. The bond bounced even tighter on the break, quoted at 101.75 to yield 6.023% this morning, a trader said.

Pro forma leverage is 1.9x through the first lien and 3.3x total, based on USD 217m in 2017 adjusted EBITDA, USD 415m in secured debt and USD 715m in total debt.

Being created post-oil price bust gives Apergy management the perspective of its trough-cycle performance as the company embarks on the levering transaction. In 2016 the Apergy unit generated just USD 117m in adjusted EBITDA, down from USD 230m in 2015 and USD 439m in 2014. If EBITDA plummeted down to 2016 levels again, under the current capital structure Apergy would carry leverage of just over 6x – high, but not necessarily unsustainable – and still kick off around USD 45m in free cash flow.

Furthermore, if EBITDA stays in line with 2017 levels or higher, the company will generate enough cash flow to pay off debt, sources noted. It would kick off USD 145m in free cash flow (20% of debt) based on USD 217m in adjusted EBITDA less USD 27m in capital expenditures – even with last year – and USD 45m in interest expense, before accounting for cash taxes and one-time transaction costs of USD 38m.

The term loan has an excess cash flow sweep at 50%, with stepdowns to 25% and 0% based on a leverage grid, according to Moody’s.

“It’s an interesting story, it’s free cash flow generating and they should reasonably de-lever over time,” said one buysider.

Getting over Dover

Buysiders agree that Apergy should be able to implement a smooth separation from Dover, as its operations and customer base were largely separate from the parent’s other business lines. “Other than changing the name on the door, the spinoff should pretty much stay and operate the same,” said a buysider.

“Our main concern is EBITDA, so we’re more focused on the margins through the cycle,” said another buysider.

Most of Apergy’s revenue (77%) came from its production and automatic technologies segment in 2017, which includes its artificial lifts. The remaining came from drilling technologies, such as the company’s market share in polycrystalline diamonds (PDCs).

“I’m generally not a fan of the oilfield service space, but they tend to have a differentiated enough product, they produce diamond drill bit inserts, so we think they have kind of a nice niche market position,” another buysider said.

While many on the buyside are fans of the credit, the popularity pushed pricing tighter than some wanted, sources said. In terms of comps, similarly-rated oilfield products company Forum Energy Technologies’ B/B2 bond has a wider yield though its unsecured notes are nearer-dated, maturing in 2021. The USD 400m 6.25% senior unsecured note changed hands on Tuesday (17 April) at 99.25 to yield 6.495%, according to MarketAxess.

Meanwhile, Precision Drilling’s USD 400m 7.125% senior unsecured notes due 2026 offer a slightly better position than Apergy, one of the buysiders posited. The notes, rated with a four-notch differential at BB/B3, traded today at 102, yielding 6.684%, according to MarketAxess. Precision has better margins and doesn’t have any secured debt sitting above the bonds, he said.

Weatherford International provides a data point for a recently completed deal backing a more troubled issuer, as the 18x-levered company in January priced a B-/Caa1 rated USD 600m 9.875% senior unsecured bond due 2025. The notes priced at 99.34 but quickly traded off as oil prices receded from highs – changing hands as low as 85.75 yielding 13.051% in early April. The bonds have recovered, somewhat, trading last week at 93.25 yielding 11.3%.

A spokesperson for Apergy and Dover declined to comment. JPM did not respond to a request for comment.

2018 Debtwire

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