New Coverage: CSI Compressco Unable to Issue Additional First Lien Debt, May Not Pay Dividends Until Leverage Improves

Relevant Items:
Covenants Tear Sheet, Debt Document Overviews
CSI Compressco’s Debt Documents

CSI Compressco LP is a provider of contract services including natural gas compression and treating services and compressor parts and component sales. The company’s customers are natural gas and oil exploration and production, midstream, transmission and storage companies operating throughout many of the onshore-producing regions of the United States as well as in a number of international locations, including Argentina, Canada, Chile, Egypt and Mexico.

In January 2021, Spartan Energy Partners LP acquired international depositary receipts, or IDRs, and 10.95 million common units from Tetra Technologies, CSI’s general partner. In November 2021, Spartan contributed interests in operating companies offering treating services; in connection with the acquisition, the IDRs were canceled and 48.4 million common units were issued to Spartan. The company’s and the Spartan treating services entities’ results of operations have been combined from the date of common control, which was Jan. 29, 2021.

As of March 10, common units of the company held by the public represented a 50.9% ownership interest, with Spartan holding a 45% limited partner interest and 0.5% general partner interest and Tetra holding a 3.7% limited partner interest.

The company’s consolidated capital structure as of Dec. 31, 2021, is set forth below for reference:

 

Significant issues under the company’s debt documents include the following:

• Financial covenant and liquidity - Although ABL facilities often include financial covenants (frequently a springing covenant based on a fixed-charge coverage ratio that springs when availability is below certain thresholds), the company’s ABL facility does not include any financial covenant.
  
  As of Dec. 31, we estimate that CSI Compressco had about $33 million of liquidity, comprising $15 million of accessible availability under its ABL, $11 million of accessible availability under a revolver held by the company’s Spartan unrestricted subsidiary and about $7 million of unrestricted cash and equivalents.


• Debt capacity - The company has no capacity to issue debt secured by a first lien on the notes collateral and $56 million of capacity to issue debt secured by a junior lien on the notes collateral. The company has $15 million of availability under its ABL facility but no additional ability to issue debt secured by the ABL collateral.
  
  The company may issue $40 million of structurally senior debt and $35 million of other unsecured debt.


• Restricted payments and investments - Under the company’s outstanding second lien notes, which are more restrictive than both the ABL and first lien notes regarding value leakage transactions, the company is currently unable to pay dividends. The company has only $25 million of capacity to make investments outside of the restricted group.
  
  If the company is able to improve its total leverage ratio to below 4x, it could access its restricted payments builder basket and general investments basket. The company’s total leverage ratio is currently approximately 5.8x.
  
  Under the ABL, the company’s ability to pay dividends or make investments is uncapped so long as the company remains in compliance with certain “payment conditions.” The payment conditions require no event of default and either (a) for 30 days prior to and pro forma for the transaction, availability must be greater than 20% of line cap and liquidity must be greater than $17.5 million, with no less than $10 million of liquidity attributable to ABL availability, or (b) for 30 days prior to and pro forma for the transaction, availability must be greater than 17.5% of line cap and liquidity must be greater than $15 million, with no less than $10 million of liquidity attributable to ABL availability and pro forma for the transaction FCCR must be 1x or better.
  
  As of Dec. 31, 2021, the company’s availability of $15.2 million was about 84% of the line cap of $18.1 million. The company’s liquidity, as defined by the ABL facility, does not include the Spartan revolver. As a result, the company had liquidity of $21.6 million, comprising $15.2 million of availability under the ABL facility and $6.6 million of unrestricted cash and equivalents (likely some portion of the cash is held by the Spartan unrestricted subsidiary; here, we assume it is all held by the company and so included in liquidity). Therefore, the payment conditions were met, so restricted payments and investments were not limited by the ABL as of that time.


• Prepayments of restricted debt - The prepayment covenant under the first lien and second lien notes prohibit only the prepayment of payment subordinated debt; currently, there is no payment subordinated debt in the company’s capital structure.
  
  The prepayment covenant of the ABL, however, applies to prepayments of the first and second lien notes. Under the ABL, the company’s ability to prepay that debt is uncapped so long as it is in compliance with the payment conditions.
  
  As of Dec. 31, 2021, the payment conditions were met, so the company is not limited in prepaying the notes. However, if the company fails to meet the payment conditions, it will be prohibited from prepaying either the first lien or second lien notes.

--Jeff Brenner