New Coverage/Tear Sheet/Issuer Covenant Card: Nine Energy Service

Relevant Items:
Nine Energy’s Debt Documents
Covenants Tear Sheet and Indenture Summary

The below article includes new analysis of Nine Energy Service Inc. as well as an issuer covenant card from the Covenants by Reorg team. Request a trial to access the accompanying tear sheet. 

Nine Energy Service Inc. was formed in February 2013 through a combination of three oil and gas service companies owned by SCF Partners LP. The company is a completion services provider that targets unconventional oil and gas resource development across all North American basins and abroad. The company partners with exploration and production customers to prepare horizontal, multistage wells for production. Continue reading for the Covenants by Reorg team's analysis of the company's debt documents.

Nine Energy Service is the borrower under a $200 million ABL facility, which includes a Canadian tranche with a $25 million sublimit. The ABL facility is guaranteed by the company’s U.S. subsidiaries and secured by substantially all assets of the company and the U.S. guarantors. The Canadian tranche is also guaranteed by Nine Energy Canada Inc. and its restricted subsidiaries and secured by substantially all assets of the Canadian credit parties. The company also has $400 million of 8.75% senior unsecured notes due 2023, which are guaranteed by the same subsidiaries as the U.S. tranche of the ABL facility.

According to the 10-Q for the 2020 first quarter, the company’s year-over-year revenue and adjusted EBITDA declined 10.3% and 11.4%, respectively. On April 21 the company received a noncompliance notice from the NYSE because its average share price had fallen below $1.00 for 30 consecutive trading days. The share price closed on July 21 at $2.04.

The company’s capital structure and leverage metrics as of March 31 are as follows:

 

 

• Liquidity and financial covenants - The company had approximately $184 million of liquidity as of March 31, $90.1 million of cash and $93.5 million of ABL availability. The company stated in its 10-Q that it then believed that amount would be sufficient to fund capital requirements for the next year.The ABL facility contains a springing 1.00x fixed charge coverage covenant that is tested if ABL availability is less than the greater of $18.75 million and 12.5% of the line cap. As of March 31, the line cap was $93.7 million, 12.5% of which is $11.7 million. The coverage covenant did not apply as of that time because availability was greater than the $18.75 million floor.


• Debt and liens - The company can fully draw down the ABL, but the ABL agreement otherwise does not contain capacity for additional first lien debt, except for a basket for incremental ABL commitments of $50 million. Because the ABL had commitments of $200 million and a borrowing base of $93.7 million as of March 31, even if the company tapped lenders for incremental commitments, it could not access those commitments without a substantial increase in the borrowing base.Under the ABL agreement, the company may also incur $10 million of debt secured by non-ABL collateral and unsecured debt of $30 million, which may be incurred by nonguarantors on a structurally senior basis. There is also a $200 million basket for unsecured bonds, but the company cannot access it because its use requires satisfying a 2.5x total leverage test, and total leverage was about 4.8x as of March 31.
  
  Under the 2023 notes, the company has greater secured capacity of $325 million, including $275 million available under the credit facility basket ($181 million assuming the ABL is fully drawn) and $50 million available under the general debt and liens basket. In addition, the notes permit the company to incur $100 million of structurally senior debt and $50 million of unsecured debt, plus additional amounts available under the 2.00x interest coverage ratio debt basket. The company’s interest coverage ratio was 2.1x as of March 31, so capacity under the ratio debt basket is likely de minimis.


• Dividends, asset transfers and debt prepayments - The ABL agreement permits an uncapped amount of dividends, asset transfers and debt prepayments if the company can satisfy an availability-based “Payment Condition.” If the pro forma FCCR is at least 1.00x, then the Payment Condition test requires pro forma availability to exceed the greater of $22.5 million and 15% of the line cap; otherwise, the test requires pro forma availability to exceed the greater of $30 million and 20% of the line cap. The Payment Condition was satisfied as of March 31 because the company had $93.5 million of ABL availability, and 15% of the line cap was $14 million. Asset transfers could potentially result in a further reduction of the borrowing base, and the company may therefore not prefer asset transfer transactions.The 2023 notes contain significantly less dividend capacity and asset transfer capacity than the ABL. The notes contain dividend capacity of $35 million and asset transfer capacity of $85 million, plus, in each case, any capacity under an RP buildup basket based on cumulative net income from Oct. 1, 2018. Usage of the buildup basket requires satisfying a pro forma 2.0x interest coverage ratio test, and that ratio was around 2.1x as of March 31, so even if the buildup basket contains capacity it may become inaccessible.

--Jeff Brenner