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Weekly performance review: High yield bonds and leveraged loans

Part 3
Weekly performance review: High yield bonds and leveraged loans (Part 3 of 7)

United Rental to acquire National Coupling: An advantage or not?

United Rentals and the high yield bond market

The fact that United Rentals, Inc. (URI) has tapped the high yield bond market (HYG) to raise $1.37 billion two-part debt adds to the incremental revenues for the company. However, the company failed to get expected reception as the bond issued was talked in the wide end. Investors were pushing hard to get the fair pricing terms, which means higher yield than what the issuer was offering. Investors were also skeptical about the company’s huge debt profile.

As of September 30, 2013, the United Rentals, Inc. (URI) had nearly $6.9 billion of long term debt in its balance sheet. The current trailing 12-month total debt-to-EBITDA ratio was 5.05x, which means that the company needs to generate more than five times of earnings, interest, tax, depreciation, and amortization (or EBITDA) to service its current debt. A higher debt-to-EBITDA ratio may result in the lower credit rating for the corporations, as many rating agencies relates high debt-to-EBITDA ratio with high probability of default on an issued debt. The company has a corporate family rating of B1 assigned by Moody’s, a credit rating agency.

URI Share priceEnlarge Graph

BB rated bond

United Rental (URI) has launched $1.37 billion two-part deal. A $525 million BB rated senior note was issued at premium 105.25 versus the initial talks of 105 levels. The 6.125% note due June 2023 is expected to provide a rate of return or yield of 5.19%. Another senior note of $850 million issued for 10-year (non-call five) period was talked about in the 5.75% area versus whispers of 5.625% and was issued at par.

Debt profile

As of September 30, 2013, the United Rentals, Inc. (URI) had nearly $6.9 billion of long-term debt in its balance sheet.

Another $1.37 billion has been raised through the high yield bond market (JNK), totaling the debt profile to $8.3 billion. This means that the company’s long-term debt/equity ratio will increase to 4.8x from the current long-term debt/equity ratio of 4.1x, a worrisome figure.

Debt maturing

The company has a huge debt of $2.3 billion maturing in 2016. Under the expectation of the long-term interest rate to rise with the onset of tapering, there is a high possibility that, if the company will approach the bond market (BND) to refinance its existing debt, it would have to pay a higher yield—adding more cost on to the company’s balance sheet. United Rentals, Inc. (URI) doesn’t have high cash reserves to pay off the debt. For now, the expectation is that, the National Coupling will bring incremental revenues for URI through cross selling, which will allow the company to service its debts.

The National Coupling acquisition

United rentals (URI) announced on March 9, 2014, its intentions to acquire the privately held National Coupling, the second-largest specialty pump rental company in North America, using the cash proceeds and a substantial amount of debt. On the day of the announcement, the company’s share price rose by nearly 4%. At a purchase multiple of 7.6x based on the last 12 months’ EBITDA, the deal has been worked out at $780 million. The deal is a cash-stock deal with $765 million in cash and $15 million in stock for National Coupling.

Synergies

Considering the fact that the national pumps revenues have grown by nearly 50% per annum in the past three years giving return on assets of 51% in 2013, the deal looks attractive for United Rentals, which plans to leverage the acquiree’s potential market share in the upstream business. The integration will allow United Rentals to foray in the pump business—up scaling the URI rental value chain. Rental business in the U.S. is expected to grow annually by 8.8% through the 2014–2017 period.

The United Rentals management has revised its outlook for the full year 2014 earnings. On the assumption that the national pump integration will finalize by mid 2014, United Rentals will only be able to take advantage of the half-year revenue growth, which will add nearly $20 million to the company’s current revenue guidance of $5.25 billion to $5.45 billion. Adjusted earnings before interest, tax, depreciation, and amortization are expected to lift up by $10 million including the national pump’s half year business.

The earlier expectation on the EBITDA was $2.45 billion to $2.55 billion.

United Rentals background

United Rentals, Inc. (URI) with a market capitalization of $8.5 billion is the leading equipment rental company. The company with $7.7 billion fleet size (nearly 41,000 units) has a U.S. market share of 12%—higher than its direct competitor Hertz equipment rentals, a subsidiary of Hertz Corporation (HTZ), which has about 3% U.S. market share.

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