Late this afternoon Standard and Poor’s downgraded One Call from CCC to CC. According to S&P:
An obligation rated ‘CC’ is currently highly vulnerable to nonpayment. The ‘CC’ rating is used when a default has not yet occurred but S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to default.
S&P also stated:
We are placing the ratings on CreditWatch Negative as One Call may not make its interest payment on its second-lien notes during the 30-day grace period.
There is an overall rating (referenced above) and individual ratings on specific bonds. Readers will recall that One Call has three levels of debt; the most senior is rated CCC, while second lien (the most junior) is rated at C. S&P does not rate the middle level aka the 1.5.
We lowered our debt ratings to ‘C’ from ‘CC’ on One Call’s second-lien notes due 2024 and senior unsecured notes due 2021, and placed the ratings on CreditWatch Negative. The recovery ratings on these debt issues are ‘0’, indicating our expectation for negligible recovery (0%) in the event of a payment default.
S&P on the senior debt’s CCC rating:
In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
We will know by Halloween what the future holds for One Call – likely before then. It is unlikely One Call is currently in compliance with its debt covenants.
The issue at hand is a “7x first lien leverage covenant” which kicks into action when the company draws down its revolver debt by 20%. According to a DebtWire article, OCCM had a “razor-thin” margin at 6.9x as of March 31.
I do NOT know what those specific covenants are, however in my experience debt holders put covenants into contracts so the debt holders can take control – partial or total – of a company that is at risk of defaulting on its debt.
Debtwire also indicated OCCM had drawn down $50 million of the $56.6 million revolver.
Allow me to translate into language we non-financial wizards understand.
Among other debt instruments – bonds etc – OCCM has “revolving” debt, which is kind of like a line of credit. The company can borrow from it and pay it back as cash flows dictate.
The “7x” is calculated by dividing the total long-term debt – which was reported to be $1.375 billion on March 31 – by cash flow (adjusted EBITDA) – which was $200 million over the 12 months preceding March 31.
So, as of March 31 OCCM had drawn down its revolver by way more than 20%, but had kept its revenue-to-debt ratio just below 7, which prevented the covenants from kicking in.
Things have deteriorated since then.