United Site Services liquidity erosion stokes creditor fears of potential sponsor financial maneuvering

Breaking News 19 October

United Site Services liquidity erosion stokes creditor fears of potential sponsor financial maneuvering

by Huiling Cai and Jay Antenen

United Site Services’ (USS) deteriorating cash position has prompted investor concerns to grow over potential financial maneuvers sponsor Platinum Equity could take to address its portfolio company’s liquidity crunch, according to four sources familiar with the company.

Advisors have been engaging with investors to discuss the situation and various scenarios that could impact creditors, said three of the sources.

Among the worries is that Platinum could inject funds into the portable sanitation services provider through a priming deal, potentially drawing on an USD 200m commitment LPs agreed to provide when they participated in a continuation fund that acquired USS in 2021, said the first two sources.

Earlier this month, the financial sponsor stepped in to support portfolio company Petmate with USD 100m in rescue financing that reportedly carries an 18.5% interest rate.

USS’s capital needs have intensified as the company grapples with industry challenges and macroeconomic headwinds involving rising labor and fuel costs, some of the sources said. A one-time ramp-up in capex spending in the second quarter also contributed to the cash burn, said the fourth source.

Liquidity at the end of the second quarter comprised around USD 10m in cash and USD 80m in revolver availability, the fourth source added—down from USD 145m in cash and revolver capacity at the end of December, according to an April report by S&P Global Ratings. USS also lined up a USD 200m ABL facility as part of the 2021 deal.

Adding to the uncertainty, Platinum has been reluctant to engage with lenders and scratched the Q&A portion during the company’s most recent earnings call, some of the sources said. Platinum partner Bryan Kelln took over as interim CEO in July after USS’s CEO and CFO departed.

Some investors remain cautiously optimistic that USS’s balance sheet will recover next year if the company is able to improve route density to boost margins, pass on higher operating costs to customers, and continue to implement cost reduction initiatives and pull back on capex, according to the third and fourth sources.

Another positive is USS has strong market share and provides must-have products, said a fifth source familiar with the matter. USS says it operates over 100 locations across the country and has the largest fleet of portable sanitation equipment that serves the construction, event, industrial and government industries.

Lenders could look to submit their own proposal to provide liquidity to the company if Platinum explores third-party options beyond its LPs, said the second source. He noted one angle lenders could use as leverage is to offer to relax covenants to facilitate the company’s ability to make additional accretive acquisitions.

Platinum acquired USS from Calera Capital in 2017 and subsequently bolted on several smaller businesses. The sponsor explored a sale of USS in early 2021 before forming a continuation fund to recapitalize the company later that year. Fortress Investment Group, Landmark Partners and Blackstone Strategic Partners were among the investors that participated in the fund.

The issuer’s USD 2bn senior secured TLB due 2028 has been moving lower this month with quotes at 77.75/79.125 today compared to quotes at 80.019/81.587 on 2 October, according to Markit. The USD 550m senior unsecured notes due 2029 traded down to 51.75 on 17 October from trades at 54.5 on 29 September, according to MarketAxcess.

S&P Global Ratings in September downgraded the issuer a notch to CCC in anticipation that the company’s credit metrics will remain at unsustainable levels. The agency said it expects USS’s lower earnings, along with the full-year impact of higher interest expense, will lead to moderately negative free cash flow in 2023. S&P said it believed USS’s liquidity would allow it to make interest payments.

Representatives of USS and Platinum did not respond to requests for comment.

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