Hornbeck Offshore Services - Becoming More Constructive After Recent Debt Exchanges

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About: Hornbeck Offshore Services, Inc. (HOS)
by: Henrik Alex
Summary

Company exchanges / retires more of its short-term debt maturities, effectively increasing its wiggle room by 13 months.

Additional measures will be needed to fully address the remaining 2020 notes.

Recent 2020 note exchange has been challenged by certain bondholders.

Management expects the OSV market to improve over the course of 2019, potentially increasing the odds to exchange more debt going forward.

Stock continues to represent an ultra-high risk/reward scenario and should only be considered by very speculative investors.

Note:

Hornbeck Offshore Services (NYSE:HOS) has been covered by me previously, so investors should view this as an update to my earlier articles on the company.

It's almost official now:

Hornbeck Offshore Services won't restructure for at least another 12 months.

Picture: Stacked Hornbeck Offshore Service Vessels - Source: Company Presentation

After already exchanging $131.6 million of its 5.875% senior notes due 2020 (the "2020 notes") for $111.9 million of new 9.5% second lien term loans due 2025 in early February, the company announced further debt measures on Wednesday morning:

  1. Borrowed an additional $50 million of first lien term loans due 2023, comprised of $30.1 million in cash and $19.9 million in exchange for $21 million in face value of its 1.5% convertible senior notes due 2019 (the "2019 notes").
  2. Effected a privately negotiated exchange of $11.0 million in face value of its 2020 notes for an additional $9,350,000 of second-lien term loans under its second lien term loan agreement.
  3. Repurchased $52.9 million in face value of its 2019 notes against $47.3 million in cash in a series of recent private transactions.

After these most recent debt exchanges, the company's maturity schedule looks as follows:

Source: Company filings

At the end of Q4/2018, the company had $225 million in cash. Adjusting for the above discussed debt measures, this number comes down to approximately $208 million without taking into account any potential cash burn from operations in the seasonally weak first quarter.

Redeeming the remaining $25.8 million in 2019 notes won't be an issue for the company which now has approximately 13 months left to address the remaining $224.3 million in 2020 notes which are currently trading around 60% of face value. While by no means an easy task, improving operational results over the course of the year - as projected by management on the most recent conference call - might convince more noteholders to exchange their bonds going forward.

That said, the company might be facing a lawsuit with regards to the 2020 notes exchange in February as certain holders of the 2020 and 2021 notes have challenged the transaction as stated in the company's recent 10-K filing with the SEC:

In February 2019, we conducted an exchange of a portion of our 2020 senior notes for second-lien term loans that mature in February 2025. Certain non-participating holders of our 2020 senior notes and holders of 2021 senior notes raised issues regarding the permissibility of the exchange transaction under the indentures governing their notes. Based upon the advice of counsel, we believe that the exchange was permissible and that we would prevail in a legal challenge to its permissibility should one arise. If the Company’s interpretation is deemed to be incorrect in a legal proceeding and an Event of Default is declared, then obligations under the 2020 senior notes and 2021 senior notes could become due prior to their stated maturities. In such an event, the Company would not be able to satisfy the accelerated amounts at such earlier time and would likely have to seek bankruptcy protection.

These dissenting noteholders are most likely hedge funds specialized on distressed debt opportunities which bought the notes at discounted prices and hope to become the company's new majority owners after a potential debt restructuring ("loan to own"). Depending on the face value of 2020 notes owned by these investors, the company could face challenges to exchange a sufficient amount of the notes to repay the remainder in cash at maturity.

Management also commented on the issue in the Q4 conference call:

Without generalizing as to all of the objecting 2020 and 2021 noteholders, we believe that there is a fraction among them who's objective is not to be repaid but rather to coerce the company into a highly dilutive restructuring with the intent of exchanging their debt for equity at a discount to our all-time low stock prices.

Said another way, we believe they see the same potential value in the equity of the company that we see and wish to help themselves to it at the expense of our current stockholders.

While we welcome constructive dialogue with all of our debt holders and we've had a lot of dialogue over the last two years that we believe has been constructive, we will vigorously oppose any and all efforts that attempt to frustrate our ability to use our financial flexibility to repay our debt obligations at their scheduled maturities.

While no lawsuit has been filed yet, the issue, clearly, adds another layer of risk to the story as very much evidenced by the recent bankruptcy of telecommunications services provider Windstream Holdings (WIN) which decided to file for chapter 11 after losing a lawsuit against hedge fund Aurelius Capital Management.

But given management's outlook for the OSV market to improve meaningfully over the course of 2019, the company's beaten down stock might be worth a bet for very speculative investors.

Bottom line:

Hornbeck Offshore Services continues its brave fight to survive the ongoing market weakness without diluting or even wiping out equityholders.

Kudos to Todd Hornbeck for not taking the easy way out and still trying to preserve value for equityholders by making additional moves to kick the can further down the road.

The most recent debt exchanges have made the remaining 2019 note maturities a non-issue and increased the chances to successfully address the 2020 notes.

That said, Hornbeck Offshore's stock essentially remains an option on a timely recovery of the ultra-deepwater drilling market.

In addition, investors now need to be wary of potential litigation by bondholders opposing the recent 2020 notes exchange.

The stock continues to represent an ultra-high risk/reward scenario and should only be considered by very speculative investors.

Disclosure: I/we 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.