Custom Ecology (dba Stafford Logistics) engaged Houlihan Lokey last month as it navigates an oncoming liquidity crunch, said two sources close to the matter. The Smyrna, Georgia-based trucking operator has actively sought a capital injection after tripping covenants in its USD 195m credit facility on multiple occasions in the past two years, added one of the sources close and a third source.
The most recent trip of covenants in the NXT Capital-arranged facility came in 2Q17 when Stafford’s LTM EBITDA declined to roughly USD 20m, said two of the sources. The 2Q17 breach of a total net leverage covenant means the company doesn’t have access to incremental borrowings under the revolver, while it also has a limited cash balance, according to a 20 September ratings note from Moody’s. The agency downgraded Stafford by two notches to Caa3 from Caa1 on liquidity concerns at the time.
The capital structure consists of a USD 175m 7.5% term loan (1% floor) due 2021 and a USD 20m revolver. One of the term loan’s holders, KCAP Financial, marked its holdings at 88% of face value as of 30 June compared to 98% at the end of 2016.
Stafford’s sponsor Kinderhook Industries, Stafford Logistics, NXT Capital did not return multiple calls seeking comment. Houlihan Lokey declined comment on the situation.
The logistics provider focuses on municipal, industrial and hazardous waste transportation solutions. Kinderhook acquired Custom Ecology and used it as a platform to roll up other companies.
The NXT funding, announced in September 2015, was used to back the company’s purchase of Stansley Industries, the sixth acquisition under the Custom Ecology platform. Since then, the company has been plagued by high labor costs and integration issues from all its deals which essentially halved the company’s EBITDA to the USD 20m range from USD 40m in 2014, said two of the sources and an industry banker.
The Moody’s note indicated that the company has a seen an uptick in revenue in 1H17 relative to 1H16, although “higher than expected costs have weakened profitability.” The note added that Custom Ecology generated USD 189m in TTM revenue, ended 30 June, implying trough margins were at 10.5% off the USD 20m EBITDA.
by Jon Berke