EXP Debt ...
One question that faces investors these days is: Will EXP remain in compliance with the terms of its lending agreements?
EXP’s covenants require that Debt to EBITDA be less than 3.5 and that there is a 2.5x interest coverage. Total debt is currently $400M; interest expenses are running at about $32M/yr. EBITA was $43M in the last quarter (Q2 2009) and the debt to EBITDA ratio is currently about 2.7 where EBITDA is summed over the most recent four quarters (i.e. $400M/($49M+$26M+$32M+$43M)). Interest coverage is 4.7x (assuming that the covenant refers to coverage with EBITA).
To make a quick calculation of EBITA one can use the “Earnings Before Income Taxes” reported in the quarterly consolidated earnings statements and add back $8M in interest and $13M in depreciation and amortization, these last two values being relatively constant quarter to quarter. Note that there would need to be a sustained drop of about 50% in earnings before the covenants would be challenged. I believe that a drop in cement income of upwards to 20% is possible (albeit not likely), but that the other divisions have already hit bottom. Thus, I’m not worried about a “covenant compliance” issue for EXP.
EXP has a $350M Bank Credit Facility effective until June 2011. Currently this credit facility is not being used. The credit facility might obviate the need for equity financing should EXP become non-compliant with respect to its senior notes. I cannot be sure since I do not know details concerning the covenants attached to the credit facility.
In the Oct 27 conference call, EXP repeatedly emphasized that it is “putting flexibility on the balance sheet” by minimizing capital investments and maximizing the cash balance (currently $17M). When questioned about the sustainability of the dividend, management reiterated that the Board re-evaluates the dividend policy every quarter. However, my sense from the comments was that the dividend is not in jeopardy, just yet.
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Details of EXP’s debts as derived from SEC filings are:
A $350M Bank Credit Facility is effective until June 2011. Outstanding principal amounts on the Bank Credit Facility bear interest at a variable rate equal to LIBOR plus an agreed margin (ranging from 55 to 150 basis points), which is to be established quarterly based upon the Company’s ratio of consolidated EBITDA, (defined as earnings before interest, taxes, depreciation and amortization) to its consolidated gross indebtedness. The Bank Credit Facility has a $25 million letter of credit facility. Under the letter of credit facility, the Company pays a fee at a per annum rate equal to the applicable margin for Eurodollar loans in effect from time to time plus a one-time letter of credit fee in an amount equal to 0.125% of the initial stated amount. Under the Bank Credit Facility, EXP is required to adhere to certain financial and other covenants, including covenants relating to the Company’s interest coverage ratio and consolidated funded indebtedness ratio.
$400M of outstanding Senior Notes were sold in a private placement transactions. They mature at various times between Nov 2012 and Oct 2019. Interest rates range between 5.25% and 6.48%. The Note Purchase Agreements contain customary restrictive covenants, including covenants that place limits on the ability to encumber assets, to incur additional debt, to sell assets, or to merge or consolidate with third parties, as well as certain cross covenants with the Bank Credit Facility. A breach of any of these covenants or failure to maintain the required ratios and meet the required tests may result in an event of default under those agreements. This may allow the lenders under those agreements to declare all amounts outstanding thereunder to be immediately due and payable, terminate any commitments to extend further credit and pursue other remedies available to them under the applicable agreements.
EXP is permitted, at its option and without penalty, to prepay from time to time at least 10% of the original aggregate principal amount of the Senior Notes at 100% of the principal amount to be prepaid, together with interest accrued on such amount to be prepaid to the date of payment, plus a Make-Whole Amount. The Make-Whole Amount is computed by discounting the remaining scheduled payments of interest and principal of the Senior Notes being prepaid at a discount rate equal to the sum of 50 basis points and the yield to maturity of U.S. treasury securities having a maturity equal to the remaining average life of the Senior Notes being prepaid.
None of the Company’s debt is rated by the rating agencies.
In the past, EXP has utilized derivative instruments, including interest rate swaps, in conjunction with an overall strategy to manage the debt outstanding that is subject to changes in interest rates. However, there were no derivative financial instruments in place during the three month period ended June 30, 2008.
The covenants do not dictate dividend constraints.
From the 2008-07-22 Q1 2009 CC:
<Q – Mike Betts>: Okay. And my third and final question was, just in terms of covenants, in terms of debt, are there any covenants that you’ve got that are sort of either net debt to EBITDA or interest cover? I mean, could you just remind us what those covenants are, if there are any?
<A – Steven Rowley>: Sure. We do have some covenants, and the net debt to EBITDA is 3.5 times, and the interest coverage ratio is 2.5 times.
AI
