Business Context and Reporting Period
This Form 8-K filing by Nine Energy Service, Inc. (the "Company") reports material events occurring on October 25, 2018. The filing details the completion of a significant acquisition, the issuance of senior notes, the establishment of a new credit facility, and the termination of a prior credit agreement.
Key Financial Metrics and Capital Structure
- Debt Issuance: Issued $400 million principal amount of 8.750% Senior Notes due 2023 at par.
- Acquisition Cost: Total consideration for the Magnum Acquisition includes approximately $334.5 million in upfront cash and 5.0 million shares of common stock.
- Acquisition Financing: Borrowed $35.0 million under the new credit facility to fund a portion of the acquisition cash price.
- New Credit Facility: Established a revolving credit facility with an aggregate borrowing capacity of up to $200.0 million, subject to a borrowing base initially set at $147.3 million.
- Interest Rates:
- Senior Notes: 8.750% per annum, payable semi-annually.
- New Credit Facility: Base rate loans at 0.75% to 1.25% margin; LIBOR/CDOR loans at 1.75% to 2.25% margin, depending on leverage ratio.
- Commitment Fee: 0.50% per annum on the average daily unused portion of the new credit facility.
Material Changes Versus Prior Period
- Termination of Prior Debt: Fully repaid and terminated all term loan borrowings and outstanding revolving credit commitments under the Prior Credit Agreement (dated September 14, 2017).
- Asset Acquisition: Completed the acquisition of all equity interests of Magnum Oil Tools International, LTD and related entities (the "Magnum Acquisition").
- Equity Issuance: Issued 5.0 million shares of common stock to the sellers of Magnum as part of the purchase price, relying on Section 4(a)(2) of the Securities Act.
Outlook, Covenants, and Contingencies
- Future Contingent Payments: The Magnum Acquisition agreement includes potential future cash payments of:
- Up to 60% of the net income for the "E-Set" tools business for the years 2019 through 2025.
- Up to $25.0 million based on sales of certain dissolvable plug products in 2019.
- Redemption Terms:
- Pre-November 1, 2020: Up to 35% of notes may be redeemed with equity proceeds at 108.750% of principal; full redemption available at 100% plus a "make-whole" premium.
- Post-November 1, 2020: Notes may be redeemed at declining percentages (104.375% in 2020, 102.188% in 2021, 100.000% in 2022 and thereafter).
- Covenants: The Indenture and New Credit Agreement impose limitations on additional indebtedness, liens, asset sales, dividends, and mergers. The New Credit Agreement includes a minimum fixed charge ratio financial covenant tested quarterly under specific conditions.
- Change of Control: Holders of the Notes may require repurchase at 101% of principal plus accrued interest upon certain change of control events.
Investor Verification Checklist
- Verify the pro forma financial impact of the Magnum Acquisition, as financial statements for the acquired business are to be filed by amendment.
- Confirm the current utilization of the new $200 million credit facility against the $147.3 million initial borrowing base.
- Monitor the Company's leverage ratio to determine the applicable interest rate margin on the new credit facility.
- Review the specific definitions of "net income" and "sales" in the Magnum Purchase Agreement to assess the potential liability of the contingent payments.
- Assess the impact of the 8.750% interest rate on the $400 million note issuance on future cash flow requirements.