Business Context and Reporting Period
This Form 8-K, filed on October 5, 2015, by Exterran Holdings, Inc. (noting the metadata reference to Archrock, Inc., which is the successor entity), reports the entry into material definitive agreements in preparation for a planned corporate separation. The company intends to separate its U.S. contract operations and aftermarket services businesses (RemainCo) from its international contract operations, international aftermarket services, and global fabrication businesses (SpinCo, to be named Exterran Corporation).
Key Financial Metrics and Debt Facilities
The filing details two new credit facilities established to support the separation. No borrowings are currently outstanding under either facility as conditions precedent have not yet been satisfied.
- RemainCo Credit Facility: A revolving credit facility increased from $300 million to $350 million. It may be increased up to $450 million subject to lender consent. It includes a $50 million letter of credit sub-limit.
- SpinCo Credit Facility: A total facility of $925 million, consisting of a $680 million revolving credit facility and a $245 million term loan facility. It includes a $500 million letter of credit sub-limit. The revolving commitments may be increased up to $900 million.
- Interest Rates: RemainCo LIBOR margins range from 1.75% to 2.75%. SpinCo LIBOR margins range from 1.50% to 2.75% (plus potential add-ons until refinancing), with term loan margins at LIBOR plus 5.75%.
- Fees: Both facilities require ticking fees of 0.30% on commitments starting December 1, 2015, until the initial availability date. Unused commitment fees range from 0.25% to 0.50% post-availability.
Material Changes and Covenants
The primary material change is the amendment of the RemainCo credit agreement to increase capacity and extend the separation deadline, alongside the execution of a new SpinCo credit agreement.
- Deadline Extension: The date by which the separation must be consummated was extended from October 30, 2015, to January 4, 2016. If the separation is not completed by this date, both credit facilities will terminate.
- RemainCo Covenants: Must maintain an Interest Coverage Ratio of at least 2.25:1.00 and a Total Leverage Ratio of no more than 4.25:1.00 (4.75:1.00 during specified acquisition periods).
- SpinCo Covenants: Must maintain an Interest Coverage Ratio of at least 2.25:1.00. Total Leverage Ratio must not exceed 3.75:1.00 prior to refinancing the term loan, and 4.50:1.00 thereafter. A Senior Secured Leverage Ratio of 2.75:1.00 applies after refinancing.
- Collateral: Both facilities are secured by substantially all U.S. assets and equity interests of restricted subsidiaries, including 65% of voting equity in certain first-tier foreign subsidiaries.
Outlook, Risks, and Contingencies
The availability of both credit facilities is contingent upon the consummation of the separation by January 4, 2016. If this deadline is missed, the facilities will terminate, and no borrowings will be available. The filing notes that the term loan facility for SpinCo is intended to be refinanced with proceeds from qualifying unsecured debt or equity issuances, which would alter the applicable leverage ratios and interest margins.
Investor Verification Checklist
- Verify the status of the corporate separation and whether the January 4, 2016, deadline is met.
- Confirm the payoff and termination of the existing Senior Secured Credit Agreement dated July 8, 2011, as a condition precedent for the RemainCo facility.
- Monitor the company's ability to meet the specified Interest Coverage and Leverage Ratios once the facilities become active.
- Review the full text of the First Amendment to the RemainCo Credit Agreement (Exhibit 10.4) and the Amended and Restated SpinCo Credit Agreement (Exhibit 10.5) for detailed covenant definitions.
- Assess the impact of the ticking fees (0.30%) on cash flow between December 1, 2015, and the separation date.