BakerCorp International, 12.5% YTM, Maturing June 2019
This week’s Durig Fixed Income (FX2) review gives us a third look at a provider of liquid and solid containment solutions, providing services to various industrial services industries. Since our last review, the company has released its FY 2017 annual results as well as its Q1 and Q2 results. Its latest results from Q2 reflect increasing revenues and solid interest coverage.
Total revenues increased 7.9% year-over-year
Revenues for the six months ending July 31, 2017 increased 2.4% as compared to the same period one year prior.
Interest coverage for Q2 is a solid 1.75x.
- The company’s European operations continue to grow, registering a 4.6% increase year-over-year.
BakerCorp’s 2019 bonds are currently selling at a discount of under 94, for a yield-to-maturity of about 12.5%. Investors looking for additional diversification as well as increased portfolio return might consider the addition of these bonds. In light of BakerCorp’s increasing revenues and interest coverage, these 2019 bonds, couponed at 8.250%, have met the criteria for additional weighting in our managed income portfolio, Fixed-Income2 (FX2). The most recent performance of our managed FX2 portfolio is shown below.
Solid Q2 Results
Recently, BakerCorp released its Q2 results (for the three months ending July 31, 2017). The company continues to refine its operations indicated by its excellent financials.
Total revenues increased year-over-year by 7.9%, from $63.2 million to $68.2 million.
Revenues for the six months ending July 31, 2017 also improved year-over-year, growing from $128.2 million to$131.3 million, an increase of 2.4%.
- The company’s average utilization rate also increased year-over-year in Q2, from 42.5% a year ago, to 48.1%. Utilization rate represents the percentage of time a unit of equipment is on-rent during a given period.
Raymond Aronoff, BakerCorp’s CFO noted on the company’s latest earnings call that Q2 saw steady year-over-year revenue growth in each month – an excellent trendsetter for the balance of the year.
Also, according to the company’s Q2 filing, its North American segment saw growth in all of its major industries, including maintenance, construction and environmental. BakerCorp’s European segments also increased revenues across many of its industries including refinery, chemical and manufacturing.
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 Strength in European Operations
In our last two reviews of Bakercorp, the company’s European operations have shown steadily growth. Since our last review earlier this year, the company released its annual report for its fiscal year (FY) 2017 ending January 31, 2017. These results show the continued growth trend in the company’s European operations. European rental revenues grew from $27.9 million in FY 2016 to $33.1 million in FY 2017, an increase of 18.4%. Overall revenues from Bakercorp’s Europe operations (from rental, sales, and service revenues) grew 18.0% for FY 2017 (from $30.1 million to $36.0 million).
For the six months ending July 31, 2017, European operations continued to show revenue growth, albeit at a slower pace. Total European revenues were $19.9 million versus $19.0 million in the prior year, an increase of 4.6%.
Robert Craycraft, CEO of BakerCorp spoke at length about the aftermath of Hurricane Harvey in the Houston area. BakerCorp has been affected in the contracts it has with refineries in the area, however there was minimal damage to its own facilities in the hurricane-affected areas. Craycraft also commented that o projects coming as a result of the hurricane should produce roughly $300,000 of revenue benefit in Q3 and $1.0 M revenue benefit in Q4. He also mentioned the opportunity for filtration / wastewater projects as a result of the hurricane’s damage.
Interest Coverage and Liquidity
Interest coverage is of paramount importance to bondholders as it indicates a company’s ability to pay interest expense on its debt. 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 July 31, 2017, operating income was $17.9 million (without the effect of depreciation and impairment charges) with interest expense of $10.2 million, for a healthy interest coverage rate of 1.75x. This interest coverage rate has improved over the company’s overall interest coverage for its fiscal year 2017 (ended January 31, 2017), which was 1.5x (operating income without depreciation and impairment of $62.1 M and interest expense of $41.5 M).
As of July 31, 2017 BakerCorp had a solid $24.6 M in cash, with an additional $40 million available from the company’s revolving credit facility.
The default risk for bondholders is directly related to BakerCorp’s ability to continue to grow its revenues within the various industries it has diversified into over the past few years. The company has been diligent to diversify into other industries and away from oil and gas. In FY 2014 the company derived 23.3% of its revenues from the oil and gas industry. Now, 92% of the company’s revenues are non-oil related. Not only has the company diversified, but it has continued to consistently grow its European revenues. And now, it looks like the company has revenue opportunities associated with the after-effects of hurricanes in the southeastern United States. In light of these considerations, the nearly 12.5% yield-to-maturity on these short 20-month bonds appears to outweigh the risks identified.
Demand for BakerCorps products has historically been higher during the second half of its fiscal year compared to the first half of the year. The peak demand period for its products and services typically occurs during the months of August through November. This peak demand period is driven by certain customers that need to complete maintenance work and other specific projects before the onset of colder weather. Because much of the company’s revenue is derived from storing or moving liquids, the impact of weather may hinder the ability of its customers to fully utilize the equipment. This is particularly the case for customers with project locations in regions that are subject to freezing temperatures during winter.
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 has posted solid results for Q2 that show increasing revenues and steady interest coverage. Its European operations continue their consistent growth and the company could realize additional revenues due to the after-effects of Hurricane Harvey. Also, BakerCorp has done a great job diversifying its revenue sources in the past few years to reduce its exposure to the volatility of oil and gas. While the yield-to-maturity on these bonds is not as high as some of the issues reviewed on the Bond-Yields.com site, it still dwarfs the 2-year U.S Treasury yields of 1.47%. These short, 20-month bonds provide investors with additional diversification and competitive returns, and have been marked for additional weighting in our FX2 managed income portfolio, the benchmarked returns of which are shown below.
Issuer: BakerCorp International
Ratings: Caa3 / CCC
Yield to Maturity: ~12.49%
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Disclosure: Durig and certain clients may have positions in BakerCorp International 2019 bonds.
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