BakerCorp International, 11.3% Yield, Maturing June 2019
This week’s review gives us our second look at a provider of liquid and solid containment solutions providing services to various industrial services industries. BakerCorp’s latest quarterly results (for the three months ending October 31, 2016) show a company that continues to implement strategies to remain competitive.
Its continued cost cutting efforts have registered an additional 7% decrease in operating expenses
BakerCorp’s European operations continue to impress, with a 17% year over year increase in Q3
Interest coverage for the latest quarter is a very healthy 2.0x.
BakerCorp’s 2019 bonds are currently selling at a discount of 94.5, for a yield-to-maturity of 11.3%. Investors looking for additional diversification as well as increased portfolio return might consider the addition of these bonds. In light of BakerCorp’s continued cost reductions, its excellent interest coverage, as well as its continued expansion of its European operations, these 2019 bonds, couponed at 8.250%, have met the criteria for additional weighting in our FX1 and FX2 portfolios.
Continued Cost Reductions
In our last review in September 2016, BakerCorp had reported Q1 of FY 2016 operating expenses had decreased by 16.6% year-over-year. BakerCorp has continued to register cost decreases in its latest quarterly results (Q3) for the three months ending October 31, 2016. For its Q3 results, the company reported total operating expenses had decreased 7% over the same period in 2015 (removing the effect of the impairment charge of $74.2 million in Q3 2015). A good portion of these cost savings have come from additional headcount reductions, with a 14.9% decrease in employees as compared to October 31, 2015.
In addition, for the nine month period ending October 31, 2016, BakerCorp also decreased its overall operating costs over the previous year period by 6.1% ($258.4 million versus $275.2 million).
Continued Strength in European Operations
Our last review highlighted the excellent performance of BakerCorp’s European operations. Specifically, the company showed its Q1 European revenues had increased 14.2% year over year. This trend has continued, as BakerCorp registered a 24% revenue increase in Q2 (ended July 31, 2016) as well as its most recent results, showing a 17% revenue increase over the same period in the prior year.
About the Issuer
Based in Plano Texas, BakerCorp International is a provider of liquid and solid containment solutions operating within the specialty sector of the broader industrial services industry. The company provides equipment rental, service and sales to its customers through a solution-oriented approach often involving multiple products. BakerCorp provides containment solutions within the United States through a national network with the capability to serve customers in all 50 states as well as a number of international locations in Europe and Canada. It maintains one of the largest and most diverse liquid and solid containment rental fleets in the industry consisting of more than 24,500 units, including steel tanks, polyethylene tanks, modular tanks, roll-off boxes, pumps, pipes, hoses and fittings, filtration, tank trailers, berms, and trench shoring equipment. BakerCorp serves multiple industries including the construction industry, municipal services, chemicals, transportation, industrial and environmental services and oil and gas. BakerCorp is owned by London-based private equity firm Permira.
Continued Effects of Oil and Gas
During its most recent earnings call, BakerCorp’s President and CEO, Bob Craycroft, made several comments regarding the continuing effects of the still recovering oil and gas markets on BakerCorps’ revenues. Craycroft commented that when oil and gas moves toward the $60 per barrel level and establishes some stability at that level, this will help BakerCorp return to their more historical revenue levels. Over the past year, oil prices have approached this level, but have continued to vary between $48 and $56 per gallon.
During FY 2016 and FY 2015, services to the oil and gas industry represented approximately 15.8% and 20.4% of total revenues, respectively. Since that time, revenues tied to oil and gas have decreased. In our last review, BakerCorp had revenues tied to oil and gas at 10.4% of total revenues. The company has continued to reduce its exposure in oil and gas. For its most recent quarter, the share of BakerCorp’s revenues from oil and gas has been reduced again, this time coming in at 8.4% of total revenues. Although the percentage has continued to decrease, BakerCorp’s decreasing services to the oil and gas industry was responsible for 5o% of the revenue decrease year-over-year in Q3.
Increasing Activity in Oil and Gas Sector
Both oil and natural gas prices have begun their recovery from the lows hit in early 2016. Most feel that prices will continue to recover, albeit slowly, but not always consistently. One bright spot in the domestic oil and gas sector is the increasing drilling activity as illustrated by the Baker Hughes rig count report.
As you can see from this recent report, the rig count in the United States has nearly doubled in the past year. Current levels are even more impressive given the fact that in May 2016, oil rig counts were at their lowest number of 318. That level had not been seen since 1947. Another encouraging note is that with a newly active rig, often new storage tanks are needed for oil and wastewater. Although no one can predict when oil prices will increase and hold steady at higher levels, the increase in oil activity should bode well for BakerCorp.
Interest Coverage and Liquidity
In order to get a clearer picture of BakerCorp’s interest coverage, it is important to look beyond the numbers listed on its latest financial report. For the three months ending October 31, 2016, operating income was $20.7 million (without the effect of depreciation and impairment charges) with interest expense of $10.1 million, for a healthy interest coverage rate of 2.0x. For the nine month period ending October 31, 2016, using the same method, operating income was $53.9 million and interest expense of $31.3 million for an interest coverage ratio of 1.7x.
As of October 31, 2016 BakerCorp had a solid $25.9 M in cash, with an additional $40 million available from the company’s revolving credit facility.
The default risk is BakerCorp’s ability to perform. The company has continued to identify and implement cost efficiencies across its operations. Its European operations are continuing to excel and the company continues to have excellent interest coverage for both its latest quarter and nine month time periods. It has also done very well in continuing to decrease its exposure to the oil and gas industry. With only 8% of its revenues now tied to oil and gas, this means that 92% of BakerCorp’s revenues are non-oil related. The other industries that BakerCorp has diversified into over the past three years continue to generate sufficient revenues to cover expenses and debt. These bonds have increased in value since our last review and consequently the yield-to-maturity has also decreased, however, the current yield to maturity of 11.3% appears to outweigh the risks identified.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
BakerCorp continues to hold to its strategy of continued cost reductions, as well as reducing its exposure to the commodity markets of oil and gas. The company’s European operations continue to impress with double digit year-over-year increases in revenues, and it continues to have excellent interest coverage. BakerCorp management also seems encouraged by the increase in U.S. drilling activity, as the company serves both upstream and downstream segments in the oil and gas industry. These 24-month bonds, currently selling at 94.5 and with a current yield to maturity of 11.3%, make an excellent addition for additional weighting in both our FX1 and FX2 managed income portfolios.
Issuer: BakerCorp International
Ratings: Caa3 / CCC
Yield to Maturity: ~11.3%
About Durig Capital
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Disclosure: Durig Capital and certain clients may have positions in BakerCorp International 2019 bonds.
Bonds have interest rate risk (as interest rates rise bond prices usually fall); the risk of issuer default; and inflation risk. In general, the bond market is volatile, bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Bonds involve a high degree of risk and are not suitable for all investors.