ELD provider ORBCOMM ditches high-priced debt for new capital structure

ORBCOMM, a leading provider of electronic logging devices and other telematics solutions, enters 2021 with a significantly different track record than it has achieved in recent years.

Last month, the company announced that it had reached a refinancing agreement with a group of banks led by JP Morgan Chase. The $200 million refinancing was done through a private transaction.

As a result, Orbcomm’s previously listed debt has been removed and no longer carries a rating from S&P Global Ratings, which said late last week that it had removed its rating from the company. ORBCOMM’s final debt rating was B, which is about midway on the scale of S&P’s lowest rating (besides default) and its lowest investment grade rating. bass of BBB-.

The move to swap more expensive debt for lower-cost funding was flagged by ORBCOMM CEO Marc Eisenberg during the company’s earnings call in late October. Speaking of the company’s cash reserve, Eisenberg said “with negligible interest income on cash, we believe that repaying some of our 8% senior notes and reducing our overall debt and our interest charges are (the) right financial decision.”

“With interest rates at historic lows and our business generating consistent free cash flow, we are actively reviewing our options for refinancing our remaining debt,” he said, according to a transcript of the call provided. by SeekingAlpha.

According to the 8-K filed by ORBCOMM with the Securities and Exchange Commission in connection with the debt offering, the new financing will include a $50 million revolving credit facility and a $200 million term loan. The rate for new loans will be based on LIBOR.

According to an S&P Global Ratings official, the notes that ORBCOMM had previously issued would have been held by a wide range of investors, who would have required a rating to acquire the debt securities. But with the kind of funding ORBCOMM currently has, with what Eisenberg described as a “select group of banks likely to keep the loan on their books”, holders would do their own due diligence on debtor funding and not wouldn’t need a rating from a company like S&P Global.

“As part of the next phase in the evolution of ORBCOMM, we have taken steps to strategically improve the capital structure of the company by replacing the old high yield notes with this term loan at an interest rate significantly lower,” Eisenberg said in the prepared statement announcing the new loan in December. “With multiple acquisitions and a full integration effort behind us, as well as lower interest expense, we are in an excellent position to execute our business plan, reduce debt levels and focus on organic growth.”

Although ORBCOMM is an ELD systems provider, it also describes itself as an Internet of Things technology provider. An ELD can be considered an IoT instrument.

“For-hire transportation companies, including truckload carriers, shipping lines, railroads and third-party logistics providers, as well as corporate internal transportation operations increasingly need solutions industrial IoT telematics to manage their transportation assets more safely and efficiently and to improve performance and utilization,” ORBCOMM said in its 10-K filing last year when describing its business.

And while ORBCOMM obtains a lot of data from ground-based assets such as trucks, it also has an extensive satellite data collection operation.

ORBCOMM saw revenue decline from a 12-month total of $268.7 million in Q4 2019 to a 12-month total of $254.3 million through Q3 2020. In its final review of ORBCOMM’s operations, S&P Global Ratings said in July that it expects revenue in 2020 to decline about 20% from a year earlier. The decline between the first and third quarter of 2020 was approximately 6.6%.

But in terms of profitability, ORBCOMM reported a third-quarter gross profit margin of 53.7%, up 20 basis points from a year earlier.

This quarter opened the door to refinancing. On the third quarter earnings call, before the deal was announced, Eisenberg explained how ORBCOMM was able to dump its higher yielding debt for the new capital structure and how the money was there. for many.

When the company started looking at what was available, “we were really impressed with the rates we were getting there, big savings from where we are now, but to get there you needed a good third quarter and a rebound.” and show you’re making a lot of money,” he said. “And where ORBCOMM is going and having a record quarter for the money [it] type of [bolstered] our ability to do so.

ORBCOMM closed the quarter with $76 million in cash, a record.

In its report, S&P said it found long-term weaknesses in ORBCOMM’s business model for its satellite IoT. While rating the company’s B debt rating as “stable”, the rating agency wrote that ORBCOMM was a “small IoT solution provider with no sustainable long-term competitive advantage”. It compared its satellite network unfavorably to those of Iridium communications. S&P also said there is potential for large telecommunications companies like Verizon to get into the satellite IoT business.

But that wasn’t going to happen overnight, and S&P said the company was “well positioned in its niche to capture greater demand for IoT services.”

Wall Street seems to approve of ORBCOMM’s performance. As of noon Monday, ORBCOMM stock was up more than 87% in the past 52 weeks.

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