A syndicate of lenders composed of National Bank of Canada, ATB Financial and Canadian Western Bank amended Essential Energy Services’ June 26, 2018 credit facility agreement. The amended credit facility provides Essential an extension of the maturity date of the revolving secured credit facility to June 30, 2022, along with revisions to certain terms and conditions.
The primary changes in the amended credit facility include:
- A decrease in the commitment from $50 million to $25 million. The maximum amount that can be drawn is decreased to $15 million during the covenant relief period.
- The creation of a covenant relief period,
- The removal of an equity cure provision
- Essential cannot distribute cash in the form of dividends or implement a normal course issuer bid.
The covenant relief period is available until Dec. 31, 2021. The amount that can be drawn under the amended credit facility during the covenant relief period is the lesser of $15 million and the borrowing base. In addition, the covenant relief period provides that the funded debt to capitalization ratio cannot exceed 20%, the funded debt to bank EBITDA ratio and the fixed charge coverage ratio covenants will not be tested. It also adds a minimum trailing 12-month bank EBITDA covenant of negative $10 million. Essential has the option to terminate the covenant relief period prior to Dec. 31, 2021 and revert to three of the financial covenants in place prior to the amendment.
During the covenant relief period, advances under the amended credit facility will be limited to the lesser of $15 million and a borrowing base that is calculated as the aggregate of a percentage of accounts receivable, inventory and certain fixed assets less priority payables.
After the covenant relief period, advances under the amended credit facility will be limited to the lesser of $25 million and a borrowing base that is calculated as the aggregate of a percentage of accounts receivable, inventory and a broader group of fixed assets less priority payables.
After the Covenant Relief Period, the borrowing base will be eliminated if the fixed asset lending value is greater than $50 million and the funded debt to bank EBITDA ratio is less than or equal to 2.75x.
The financial covenants after the covenant relief period include:
- The funded debt to capitalization ratio cannot exceed 50%
- The funded debt to bank EBITDA ratio cannot exceed 3.5x
- The fixed charge coverage ratio must not be less than 1.25x
On July 9, 2020, Essential had a cash balance of $6.6 million, net of long-term debt. Debt, excluding IFRS 16 lease obligations, was low in the second quarter. As activity was slow, due to seasonality and COVID-19 economic disruption, receivables were collected, and expenses were low. Debt is anticipated to increase when activity increases as accounts receivable accumulate. The outlook for activity for the remainder of 2020 remains uncertain. Essential announced cost cutting steps early in the second quarter and a modest capital spending forecast for 2020. Amending the credit facility is expected to proactively provide Essential with sufficient liquidity and additional financial flexibility through to the end of 2021.
Essential Energy Services provides oilfield services to oil and natural gas producers, primarily in western Canada.