Moody’s downgrades Avista-backed Hi-Crush as energy credit dwindles

  • Hi-Crush stock trading around $4 down from $69 in 2014
  • Moody’s downgrade covers $200 mln of debt
  • Analyst sees deterioration in energy sector credit

Hi-Crush Partners, an Avista Capital-backed provider of sand used for fracking, absorbed a debt downgrade from Moody’s amid uncertainty about liquidity levels in the energy sector.

The downgrade comes as the company’s customers face dwindling credit levels after oil prices have failed to recover from dramatic drops starting in late 2014, Moody’s said.

“Customer credit is deteriorating from prolonged end-market weakness and any extended payments by customers would pressure Hi-Crush’s cash flow,” Moody’s analyst Karen Nickerson said in a note to clients.

Looking ahead, the company’s EBITDA level may not meet its required threshold to tap $39.8 million in its revolving line of credit, Moody’s said.

Hi-Crush reported a 34 percent drop in adjusted EBITDA in 2015 in the face of an oversupply in global oil markets, tepid growth in demand and uncertainty around an oil price recovery, Moody’s said.

Over the same period, the company’s adjusted debt-to-EBITDA levels grew to 3.3x from 1.7x, according to Moody’s.

The plight of the Houston firm has been reflected in the price of its master limited partnership units, which now trade below $4 a share, a fraction of their all-time high of $69.15 in August of 2014.

The units took a beating last fall, when Hi-Crush suspended its dividend, closed a sand production facility in Augusta, Wisconsin, and laid off 27 workers in the face of challenging market conditions.

“Hi-Crush’s margins have compressed, and while still healthy, are expected to continue to deteriorate in 2016 despite cost cutting and asset optimization initiatives,” Moody’s said.

Moody’s said about $200 million in Hi-Crush debt securities were affected by its ratings change. The debt research firm cut its corporate family rating on Hi-Crush to Caa1 from B3. Its ratings outlook remains negative. Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk, according to Moody’s definitions. Obligations rated B are considered speculative and are subject to high credit risk.

A Hi-Crush spokeswoman declined to comment on the debt downgrade.

The company produces sand that is mixed with water and injected into the ground to help break up shale rock during fracking, formally known as hydraulic fracturing. The rock is broken up to release oil or natural gas.

Avista Capital initially invested in the company in 2010 and took it public in 2012.

Thompson Dean, co-founder of Avista Capital, told Buyouts in 2014 that Hi-Crush had generated a return of 20.7x as of June 30, 2014. The performance contributed to the return of its vintage 2008 Avista Capital Partners II.

Avista sold 3.26 million common units at $62.91 a share in August 2014, for proceeds of $198 million, in a follow-on offering. Avista is the majority owner of Hi-Crush Proppants LLC, which owns about 37 percent of Hi-Crush’s publicly traded shares, according to a February 23 Hi-Crush 10-K filing.

Action Item: See the Hi-Crush 2015 annual report here:

Photo: A worker hoses down drilling equipment with water at a shale gas fracking facility run by Poland’s PKN Orlen Company on the outskirts of the village of Uscimow, south-eastern Poland, June 5, 2013. REUTERS/Peter Andrews