PHI Inc secured bond pricing expectations drift into double digits on concerns around asset coverage, oil and gas exposure

Helicopter transportation company PHI Inc is expected to widen pricing on its senior secured notes offering, as investors voice concerns around the deal’s collateral package, as well as the firm’s high leverage and exposure to the volatile oil and gas market, said six sources following the deal.

Led by UBS, the B3/B- rated USD 500m five-year non-call two senior secured bond was launched on Monday (18 June), with the roadshow ending today and pricing expected thereafter.

Whispers were circulated at 9% earlier in the week, but have now drifted wider to north of 10%, according to two buyside sources following the deal. The company is also expected to amend the covenant package to tighten restrictions around asset transfers, sources said.

Along with a proposed USD 100m term loan due 2021, proceeds for the notes will repurchase and redeem PHI’s existing USD 500m 5.25% senior unsecured notes due 2019, fully pay down and retire the existing revolver, and fund general corporate purposes. In conjunction with the notes offering, the company will also enter into a new USD 75m revolving credit facility.

PHI’s recent acquisition of HNZ Group’s offshore business at the end of 2017 has driven increased revenues by boosting the company’s presence in international oil and gas end markets, the company said in deal documents.

The company’s oil and gas business contributed 59.6% of operating revenues in 1Q18, compared to 51.5% in FY17, according to deal documents. Over the same period, the air medical division’s contribution dropped to 35.5% from 44.4%. The technical services business made up the balance.

Sources noted that the company’s growing reach in oil and gas also increased its exposure to volatility in the space.

“More than half of the business is exposed to offshore and deepwater, a sector that we don’t think will stabilize for another few years,” said a buysider. “The company is asking investors to have faith in the oil and gas market.”

That increased exposure to volatility comes alongside scant margin for error, with PHI’s leverage already high and cash flow looking tight, sources said.

PHI is levered around 8.6x, based on USD 69.7m LTM combined adjusted EBITDA and USD 600m in total debt, according to deal documents. Taking out the adjustments for the HNZ offshore acquisition, the company’s LTM EBITDA through 31 March drops to USD 22.6m.

Depending on how the oil and gas sector performs, sources estimated that PHI could be free cash flow neutral or burn up to USD 10m over the next year, assuming USD 80m-90m in adjusted EBITDA for 2018, USD 30m-40m in capex, USD 1m-2m in cash taxes and USD 50m-60m of interest expense.

Pro forma the new deal, the company’s liquidity includes approximately USD 7.4m in cash, USD 23.5m in short-term investments and USD 75m of availability through its new revolver.

Three sources who listened to the investor call on Tuesday (19 June) said that they did not feel the company had done much to ease buysiders’ concerns, despite facing plenty of questions. By Wednesday morning, buysiders said they were being informed that the book was still not filled, and pricing expectations had widened to at least the mid 10% area.  

Collateral coverage

PHI’s existing USD 500m 5.25% senior unsecured notes due 2019 last traded today at 95 to yield 12.6%, according to MarketAxess.

The new notes offering is secured—but buysiders were underwhelmed with the collateral package, which carved out the air medical aircrafts without a clear valuation, sources said.

The collateral package for the secured bond includes 86 aircraft from its oil and gas segment, as well as a 66% pledge of the equity interests of PHI’s international holding company, according to deal documents.

Buysiders expressed some doubt over the valuation of the collateral. The aircraft were appraised at a value of USD 461.5m on 31 December in what deal documents referred to as “desktop valuation.”

The company revealed at the investor lunch that the valuations came from a database that draws on average valuations for similar aircraft, said a source following the deal.

One source used their own average valuation of USD 5m per aircraft, estimating that the collateral is worth around USD 400m—lower than the company’s USD 461.5m figure, and significantly short of the USD 600m the company is raising through the new bond and loan offering.

Sources were surprised that the air medical aircrafts were excluded of the collateral. “I don’t understand why they would do that,” said a buysider. “It might hurt them. I wouldn’t be surprised if the deal is pushed to a double-digit coupon based on the asset coverage, or lack thereof.”

Sources said they preferred Bristow Group’s USD 350m 8.75% senior secured bond due 2023 as it offered a better collateral package.

That deal, which was priced earlier this year, was trading today at 98.25 to yield 9.212%, according to MarketAxess.

PHI representatives did not respond to requests for comment. UBS declined to comment.

2018 Debtwire

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