NES Confronts Another Downturn In Construction Markets

The last time the economy turned south, NES Rentals Holdings fell into bankruptcy. Now the company, owned by Diamond Castle Holdings, is facing challenges yet again.

NES Rentals provides equipment rental services to the non-residential construction market. Its primary business is renting aerial equipment like cranes, boom trucks and scissor lifts from its 81 locations in the United States. But with demand falling as the construction market stalls, there’s a fresh round of concern from the credit ratings agencies about how the company will fare the current downturn.

New York-based Diamond Castle acquired NES Rentals in July 2006 for about $850 million. The deal included a $170 million equity investment from Diamond Castle Partners IV LP, two senior term loans totaling $400 million, and an asset-based revolving credit line totaling $480 million, according to Reuters Loan Pricing Corp. The debt related to that acquisition is still a major component of the company’s capital structure and leverage is relatively high, at more than 85 percent debt to capital, according to Standard & Poor’s. Total debt at the company as of Sept. 30 2008 was estimated at approximately 4.2x EBITDA.

Late last month Moody’s Investors Service said the company had “relatively weak interest coverage” that would probably decline even more with construction markets expected to struggle for most of 2009. Moody’s also noted that declining equipment values could reduce the value of collateral supporting the NES Rentals’ debts, and said it was possible the company could suffer a covenant breach on its revolving credit line should the soft construction market continue into 2010. NES Rentals’ corporate family and probability of default ratings were lowered to ‘Caa1’ from ‘B3.’

S&P changed its outlook on NES Rentals to negative from stable in December but reaffirmed the company’s ‘B+’ corporate credit rating. However, the agency noted that it would consider a ratings downgrade if the company appeared unlikely to generate more than $25 million of free operating cash flow in 2009.

When NES Rentals was acquired by Diamond Castle in July 2006, the company had revenues of approximately $582 million and profits of about $33 million, according to a Buyouts article written at the time.

NES Rentals was formed in 1996 by buyout firm Golder, Thoma, Cressey, Rauner Inc. Called National Equipment Services Inc. at the time, it was set up as a vehicle to drive a consolidation play in the construction equipment rental market. Just two years after its formation, National Equipment had more than 70 locations and was generating $218 million in revenues. It looked like the company was on the fast-track, so in 1998 the company was taken public via a $94.5 million IPO.

Trouble hit, however, in the aftermath of the Sept. 11, 2001 terrorist attacks, as demand for equipment rentals dropped. National Equipment was no longer able to quickly shed the debt it acquired from its aggressive growth. By November 2002, the company had amassed $485.5 million in debt and its stock was trading at a meager 53 cents per share. The New York Stock Exchange suspended its shares from trading and the company had to find a temporary home on the Pink Sheets before it filed for Chapter 11 protection in June 2003 with a pile of about $800 million in debt, according to reports at the time.

When it emerged from bankruptcy in February 2004 having eliminated about $275 million of debt from its balance sheet, the company took on its current moniker.