Another strong sign that the mining services industry is still not out of the woods is the announcement by Boart Longyear (ASX: BLY) of a US $300 million debt offering designed to pay down its heavily geared business.
The company, based in the US and listed on the ASX, has currently a gross gearing of 83.3% based on its interim business results released in August. After realising a $355 million net loss due mostly to asset write-downs and restructuring, the debt offering follows a credit rating downgrade by Moody's rating service from B2 to B1.
To make the deal more attractive to debt buyers, the company is offering 10% interest annually until its October 2018 maturity. In addition, to allay concerns that the company will only borrow more money later on, returning itself to a high gearing position again, it has made an arrangement for its current revolving credit facility to be reduced from $450 million to $150 million, and has added covenants to maintain at least $30 million in liquid assets and improve its interest coverage ratio.
In 2011, debt levels were much more manageable, but the past two years have taken their toll on other mining service companies as well. Macmahon Holdings (ASX: MAH) declared a $29.5 million loss after its revenues were down by $500 million compared to the year before. Sedgman (ASX: SDM) had its turnover pared back by $140 million, resulting in earnings falling by almost 75%.
Several others were affected, yet still didn't suffer dramatic profit drops. Ausdrill (ASX: ASL) had a record high in revenue, but still saw about a 10% decrease in profits from smaller operating earnings margins. NRW Holdings (ASX: NWH) was similar with higher revenues and lower profits.
Foolish takeway
It only takes a few years to make a difference in the earnings prospects from up to down. Investors need to look deeply into a company's financials to see where losses are coming from — reduced turnover, compressed profit margins, write-downs, etc. When the news headlines talk of dire events, you have to take a close look to see what value there actually is before you decide what price you would pay for it.
For investors starting a new position in a company, this is when the fat is getting cut out, and once it is done, what is left over may be a stronger company ready for the next market upturn. Look for companies that have fared the best and possibly are making acquisitions at this time. When debt gets high, cash is king.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
