Investors have expressed confidence that Williams Scotsman International can reduce overheads and increase its diversification through its acquisition of ModSpace, with the specialty rentals company’s USD 300m senior secured notes offering set to price today at 6.875%, tight of talk, according to four sources following the deal.

The USD 300m five year non-call two senior secured notes offering—which is coming through Mason Finance Sub—was launched yesterday (30 July) with whispers in the 7.25%-7.5% area. Lead Deutsche Bank announced official price talk for the B2 rated bond at 7%-7.25% earlier today, and the deal was more than 2x oversubscribed this afternoon, two of the sources said.

Along with the secured notes, the company will use ABL borrowings, a private placement of USD 200m unsecured notes, a USD 128m equity raise and a USD 103m common stock consideration to fund the USD 1.1bn acquisition of ModSpace as well as pay fees and expenses.

After failing to complete the acquisition two years ago as Algeco Scotsman, the company last month announced plans to try again with a stock and cash structure. Williams Scotsman’s stock traded up 25% to USD 15.20 from USD 12.15 on 22 June after the company announcement.

Pro forma leverage is 5x, based on USD 1.64bn total debt and USD 322.6m of LTM adjusted bank EBITDA, which gives credit for cost synergies for ModSpace, Acton and Tyson Onsite and other acquisition-related costs.

Based on consolidated pro forma adjusted EBITDA of USD 245.982m as of 31 March—which excludes cost synergies—leverage comes to 6.7x.

Pro forma liquidity will be USD 882m, based on USD 37m in cash and USD 845m of availability under a new USD 1.35bn ABL revolver. The revolver size could be increased up to USD 1.8bn if certain conditions are met.

The company could also raise additional equity down the road, two of the sources said. “The stock is doing very well. It is on the upside valuation for me,” the second source said. The stock currently trades at USD 16.70 for a market cap of 1.68bn.

The new notes offer a slight premium to Williams Scotsman’s USD 300m 7.875% second lien secured notes due 2022, which last traded in size on 25 July at 104.25 to yield 6.453%, according to MarketAxess. Algeco Scotsman’s USD 520m 8% senior secured notes due 2023 last traded in size today at 102.75 to yield 7.105%. The new notes will be pari passu with Williams Scotsman’s existing 2022 notes and the expected privately-placed unsecureds, according to deal documents.

Both ModSpace and Algeco/Williams Scotsman have struggled with over-levered balance sheets in the past. ModSpace went through a restructuring last year, while Algeco Scotsman sold Williams Scotsman to Double Eagle Acquisition Corp, a special purpose acquisition company, according to SEC filings.

After the initial deal with ModSpace was terminated in 2016, Algeco restructured its PIK loans last year, and was able to extend its ABL revolver, as Debtwire reported.

Buysiders expressed confidence that the new deal would open up a path to stronger cash flow generation. “Interest expense was cramping their cash flow,” said one. “This is hopefully freeing that up.”

However, some buysiders sounded a note of caution, pointing to the company’s history of debt restructurings and poor cash flow generation.

“The company has had issues with capital allocation in the past,” said another. “They seem to spend a lot of cash flow on buying new equipment. They haven’t exercised enough discipline, and they’ve been through some debt exchanges. It just hasn’t been a good story.”

Buysiders following the deal said they expected the company to generate USD 14m of free cash flow in 2018 (0.85% of total debt) based on an expected USD 276m of adjusted EBITDA, USD 117m of interest expense and USD 145m of capex. The acquisition should lead to more flexibility on capex going forward because of reduced overheads, the sources added.

“After the acquisition, they need to wring those synergies from a more overhead perspective. They don’t need two of everything,” one buysider said.

The modular space time continuum

With the modular space and portable storage operations business exposed to cyclicality—particularly through the oil and gas sector—buysiders need to have confidence in the company’s operations, three of the sources said.

Most of the company’s major end markets have a direct positive correlation with the market and GDP, the sources added. “As GDP softens, so does the need or want for their modular units,” said one.

By far the biggest factor for the company’s earnings is oil, said one buysider: “Oil is in an upswing and we expect that to continue, so we also expect the company to do well after the acquisition.”

Oil prices have rallied significantly this year, with WTI last quoted at USD 68.94 a barrel, up from its most recent trough of around USD 59 context in early February.

Bearing in mind the importance of clients in the energy space, the ModSpace acquisition helps diversify William Scotsman’s capabilities, enabling it to benefit from expected growth across the modular space sector in the coming years, said two of the sources.

As of 31 March, William Scotsman’s rental fleet net book value was comprised of 37% mobile and sales, 35% complexes, 6% classrooms, 4% portable storage, 3% value-added products and services and 15% other modular space, according to company documents.

For the same period, ModSpace’s rental fleet net book value consisted of 29% mobile and sales, 53% complexes, 7% classrooms, 6% portable storage, 1% value-added products and services and 4% other modular space for the same time period, according to company documents.

The combined company’s historical net book value at 31 March totaled USD 1.913bn, according to company documents.

“All of these businesses are built as rollups. This acquisition is bigger than they’re used to, but they should be able to handle it,” one buysider said.

Deutsche Bank declined to comment. The company did not respond to request for comment.

2018 Debtwire