Thursday, July 31, 2014

Walter Energy's "Senior Secured Leverage Ratio"

Just doing some back of the envelope math on their senior secured leverage ratio. The TTM "adjusted" EBITDA looks to be about $130 million. And using the 3/30/14 debt number and mrq cash balance, they had $1.685 billion in secured debt net of cash. That's a 13x ratio!

The ratio will roll even higher after Q3 as we expect that higher EBITDA Qs roll off and are replaced by lower or negative EBITDA, and as more cash is burned (increasing the numerator).

My reading of the loan documents is that they can borrow $51 million additional on the revolver (factoring in the letters of credit outstanding) before a secured debt leverage ratio test kicks in to govern borrowing additional amounts. The leverage ratio on 9/30/14 would have to be under 7.5x, which doesn't seem likely.

I don't see how they were justified in talking about ample liquidity (from possible revolver borrowing) today when there is this issue with the leverage ratio? Surprised that it did not come up on the earnings call.


  • “Senior Secured Leverage Ratio” shall mean, on any date of determination, the ratio of (x) the remainder of (A) Senior Secured Indebtedness of the U.S. Borrower and its Subsidiaries on such date less (B) Unrestricted cash and Cash Equivalents of the U.S. Borrower and each Subsidiary Guarantor on such date to (y) Consolidated EBITDA for the Test Period most recently ended on or prior to such date; provided that (i) for purposes of any calculation of the Senior Secured Leverage Ratio pursuant to this Agreement, Consolidated EBITDA shall be determined on a Pro Forma Basis in accordance with clause (iii) of the definition of “Pro Forma Basis” contained herein and (ii) for purposes of any calculation of the Senior Secured Leverage Ratio pursuant to the definition of “Permitted Acquisition” only, Indebtedness shall be determined on a Pro Forma Basis in accordance with the requirements of the definition of “Pro Forma Basis” contained herein.” [3rd amendment to credit agreement]
  • Allowed Senior Secured Leverage Ratios from 6th amendment; not sure if these were changed by the most recent amendment: "June 30, 2014 8.00:1.00 September 30, 2014 7.50:1.00 December 31, 2014 6.50:1.00 March 31, 2015 5.50:1.00 June 30, 2015 5.00:1.00 September 30, 2015 4.50:1.00 December 31, 2015 and each Fiscal Quarter ending thereafter 3.75:1.00" [6th amendment to credit agreement]


whydibuy said...

Seen this many times.
When a co is in such dire straits, its serves no purpose for the co to be upfront about the financial situation. What would be the good that could come of it? Have suppliers put them on cash and carry terms? Cut off what credit they get now? So the exec's just put up a bold front and say all is under control even if they are talking to a bk law firm as they say happy things.
What is interesting to watch is how the stock still holds up until bk is actually imposed. It really should be a penny stock at this point.

Anonymous said...

didn't they deal with this in the new bond deal?

Anonymous said...

Here are all of the amendments to the credit agreement:

And the 7th amendment:

What it says about the SSLC:

2. Section 10.08 of the Credit Agreement is hereby amended by deleting the ratio “8.00:1.00” appearing opposite the Fiscal Quarter ending June 30, 2014 and inserting the following in lieu thereof:
“Unlimited, or in the event that the Borrowers have not received proceeds of Permitted First Lien Notes (issued as Permitted Refinancing Indebtedness pursuant to Section 10.04(i) in respect of the Total Revolving Loan Commitment) in an aggregate principal amount equal to at least $275,000,000 or such proceeds are not applied to a permanent reduction of the Total Revolving Loan Commitment within 7 days (or such longer period during the Fiscal Quarter ending September 30, 2014 as may be determined by the Administrative Agent in its sole discretion) of the Seventh Amendment Effective Date, 8.00:1.00”.

So it looks to me like the SSLC was "dealt with" by a temporary reprieve and will be back in effect for 9/30.