An 11.5% Yield Investors Must Avoid

| About: Global Geophysical (GEGSQ)

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

The tough part about interest rates being low is that income investors such as myself don't have a lot of options. Don't get me wrong there are plenty of yields over 7%, but the issue now is that riskier companies are being able to lock in relatively good yields.

Last week, Global Geophysical Services Inc. (GGS) issued $8 million of perpetual preferred stock at an 11.5% rate. Many income investors are probably very excited to hear that, but hold on a second. Why would Global Geophysical issue a preferred at such a high rate?

Honestly, given the risk profile of Global Geophysical, 11.5% is pretty good for them, but awful for preferred investors. When looking at the company's balance sheet, you will notice that this company is making positive free cash flow, but as you look deeper, this is due to significant depreciation.

Global Geophysical is in the business of providing seismic solutions to O&G companies. These solutions help by image mapping the earth's surface, which can be fairly complex to navigate for many O&G companies.

With companies like this, they are often able to depreciate a large portion of their assets. In the last three years, the average annual depreciation has been over a $120 million. In the last four quarters, the asset value has continued to decline. This means that eventually GGS won't be able to depreciate as much going forward.

The other concern is that the debt load is continuing to grow. Long-term debt now stands at $330 million. Interest expense is now $8.8 million a quarter or $35.2 million a year. In the latest quarter, the company reported a net income loss of $24 million. So as you can see raising only $8 million doesn't really mean much for this company.

While there is positive free cash flow on paper, the issue is that this is not likely to remain if the debt keeps growing. It's also important to note that the company only has $17.8 million in cash. So about 5% of the total debt amount. One bad quarter could significantly erode all the liquidity due to high interest payments.

This preferred may seem to have a great yield, but keep in mind interest rates are low. Companies that are able to only issue preferreds at double digit rates in this environment have some serious risks involved.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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