GulfMark says balance sheet ‘strong,’ loan amendments give ‘headroom’

By Paul Deckelman

New York, July 23 – GulfMark Offshore, Inc. finished the 2015 second quarter with a “strong” balance sheet, the company said Thursday – despite the pronounced downturn in the offshore energy drilling industry that it serves.

That balance sheet improvement was one of what its president and chief executive officer called “the proactive steps we have taken to combat this industry downturn.”

Quintin V. Kneen told analysts and investors on the Houston-based marine transportation services provider’s conference call following the release of its quarterly and first-half results that “we have acted decisively in adjusting our cost structure and capital structure,” the latter including amendments to its multicurrency revolving credit facility to give GulfMark more leeway on covenant compliance.

“These actions, coupled with our operational efficiencies, have allowed us to build our cash position and [are] propelling GulfMark nicely through this downturn.

“We said in February that we were not going to look back and wish we had acted sooner on adjusting our cost structure and capital structure,” Kneen added.

“We continue to take all the steps that position us to remain cash flow positive each quarter of this downturn. I don’t foresee GulfMark having to modify its capital structure in any additional way to push though this downturn.”

Amendments provide ‘headroom’

GulfMark ended the quarter on June 30 with total debt of $572.7 million, including $500 million of 6 3/8% senior notes due 2022 that it had sold in two tranches – the original $300 million sold in March 2012 and a $200 million add-on came to market in December 2012.

It also had $72 million outstanding under its revolver, a sequential increase of $12 million from the first quarter ended March 31.

In September 2012, GulfMark had originally entered into a $150 million five-year multicurrency revolver carrying an interest rate of 225 basis points over Libor.

GulfMark replaced that facility last September with the new revolver increased in size to $300 million, plus a $100 million accordion feature, with the maturity extended to September 2019. The annual fee for unused commitments under the new facility was 37.5 bps, and unused borrowing capacity at June 30 was $228 million.

Since the start of the year, GulfMark and its lenders have amended the facility twice. In February, the parties agreed to reduce the requirement under the covenant governing the company’s interest-coverage ratio. In return for that covenant easing, GulfMark agreed to certain financial restrictions, including limits on its ability to make certain payments for dividends, acquisitions or share repurchases. The unused commitment fee rate increased by 12.5 bps, growing to 50 bps.

In early July, just after the end of the second quarter, GulfMark and the lenders again amended the revolver, with several of the covenants made easier. The interest-coverage ratio requirements applicable to certain periods was reduced, there were changes made in the ratio of required collateral to lenders’ commitments for certain periods, a new mechanism for curing defaults on financial covenants was added and a requirement that GulfMark take delivery of certain vessels was removed.

The company’s executive vice president and chief financial officer, James M. “Jay” Mitchell, said that the revisions were enacted “to allow more flexibility throughout this industry downturn. This amendment was simply to provide as much cushion on our covenants as possible in an uncertain environment.”

He noted that in return for the easier covenants, commitments under the facility were reduced to $200 million from $300 million.

Several other changes adopted as concessions to the lenders included increasing the commitment fee during certain periods to 75 bps; increasing the interest rate on the facility to Libor plus a margin, currently at 275 bps; adding a new covenant that liquidity not be less than $50 million; and reducing the amounts of business acquisitions, collateral dispositions, capital expenditures, joint ventures, distributions to equity holders and debt permitted during certain periods.

Taking into account the $100 million reduction in the overall commitment size, plus standby letters of credit, unused revolver borrowing capacity following the second amendment was $126.4 million.

The company has a separate facility, denominated in Norwegian kroner, with one of its subsidiaries providing maritime services to customers in the North Sea region as the borrower. The facility, led by a Norwegian bank, provides for a maximum commitment of NOK 600 million (about $76.4 million). The original December 2012 agreement was subsequently amended in June 2013 and in February and again in July of this year, along similar lines to the multicurrency facility’s amendments, although the commitment level remained unchanged at NOK 600 million. As of June 30, the facility was undrawn.

Kneen said that the credit facility amendments “provide all of the covenant headroom necessary for a downturn that’s worse than most people are predicting.”

He also noted that only 39% of the company’s 72 assorted vessels in its worldwide fleet are being used as collateral to support the revolving credit facilities.

The CEO said that “our banking relationships are long and deep. ... We’ve got a great balance sheet. The assets side is solid.”

The company currently has $70 million of payments scheduled over the next 12 months on three new vessels it has ordered, which Kneen said was “a small amount of remaining capex that can easily be funded with remaining cash on hand today.”

Leverage measure falls

Mitchell said that despite slower energy industry conditions that caused the company to report a net loss of 33 cents per share, or 27 cents per share excluding employee severance and exit costs, GulfMark still generated $14.8 million of cash from operations during the quarter, an improvement over the year’s first quarter.

Cash on hand at the end of the quarter was $78.4 million; since the end of the quarter, he added, “we've continued to increase our cash, and our current cash balance is approximately $88 million. For now, that cash is building overseas, while the revolver is drawn in the U.S.”

He said that “we do anticipate being cash flow positive for the remainder of the year.”

The CFO said that GulfMark’s ratio of net debt as a percentage of the company’s book capitalization dropped to 32.5% in the second quarter from 34% in the first quarter, both falling within the company’s target range for the leverage measure of between 25% and 35%.

He said that total liquidity – availability under its revolving facilities plus cash, including the net proceeds from the recent $7 million sale of one of its older North Sea ships – stood at over $290 million.

Interest expense for the second quarter was $8.2 million, which Mitchell said was “consistent with the first quarter.”

He projected that interest expense “should be flat in Q3, excluding a [$1.7 million] write-off related to the downsizing of our revolver.” For the full year, he said, GulfMark anticipates interest expense of about $33 million, excluding the write-off.

CEO Kneen said that while the company’s current cash on hand exceeds its capital requirements, “we continue to opportunistically market vessels in the secondary market to maximize our cash position. One of the primary objectives is to remain free cash flow positive throughout each quarter of the downturn.”

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