ORBCOMM, a major supplier of electronic logging devices and other telematics solutions, is entering 2021 with a significantly different balance sheet than it has been carrying in recent years.
Last month, the company announced it had reached a refinancing agreement with a group of banks led by JP Morgan Chase. The $200 million refinancing was done as a private transaction.
As a result, Orbcomm’s previously publicly traded debt has been retired and no longer carries a rating from S&P Global Ratings, which said late last week that it had pulled its rating on the company. ORBCOMM’S final debt rating was B, which is about halfway through the ladder of S&P’s rock-bottom rating (besides default) and its lowest investment grade rating of BBB-.
The move to swap out more expensive debt for lower-priced financing was signaled by ORBCOMM CEO Marc Eisenberg on the company’s late October earnings call. Talking about the company’s cash stockpile, Eisenberg said “with negligible interest income being earned on the cash, we believe paying down some of our 8% senior notes and reducing our overall debt and interest expense is (the) right financial decision.”
“With the interest rates at historical levels 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 supplied 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 on the new loans will be LIBOR-based.
According to an official at S&P Global Ratings, the notes that ORBCOMM previously had issued would have been held by a wide range of investors, who would have required a rating to acquire the debt instruments. But with the type of financing that ORBCOMM now has, with what Eisenberg described as a “tight group of banks that may keep the loan on their books,” the holders would be doing their own due diligence on the debtor’s financing and would not require a rating from a company like S&P Global.
“As part of the next phase of ORBCOMM’s evolution, we’ve taken actions to strategically improve the Company’s capital structure by replacing the previous high-yield notes with this term loan at a significantly lower interest rate,” Eisenberg said in the prepared statement announcing the new loan in December. “With multiple acquisitions and a comprehensive integration effort behind us, as well as lower interest expense, we are in a great position to execute on our business plan, reduce debt levels and focus on organic growth.”
While ORBCOMM is a provider of ELD systems, it describes itself also as a supplier of Internet of Things technology. An ELD could be viewed as an IoT instrument.
“For-hire transportation companies, including truckload carriers, shipping lines, railroads and third-party logistics providers, and the in-house transportation operations of enterprises are increasingly requiring industrial IoT telematics solutions to manage their transportation assets more safely and efficiently and to improve performance and utilization,” ORBCOMM said in its 10-K filing last year in describing its business.
And while ORBCOMM gets plenty of data from ground-based assets like trucks, it also has an extensive satellite-based data-gathering operation.
ORBCOMM saw its revenue decline from a 12-month total of $268.7 million in the fourth quarter of 2019 to a 12-month total of $254.3 million through the third quarter of 2020. In its final review of ORBCOMM’s operations, S&P Global Ratings said in July that it expected revenues in 2020 to decline about 20% from the prior year. The decline between 2020’s first quarter and third quarter was about 6.6%.
But in terms of profitability, ORBCOMM had a gross profit margin in the third quarter of 53.7%, up 20 basis points compared to the prior year.
That quarter opened the door to the refinancing. In the third-quarter earnings call, before the deal was announced, Eisenberg talked about how ORBCOMM was able to dump its higher-yield debt for the new capital structure and how cash had a lot to do with it.
When the company started looking at what was available, “we were really impressed with the rates that we were getting there, significant savings versus where we are now, but to get that pulled off, you needed a good Q3 and a rebound and to show that you’re generating a good deal of cash,” he said. “And where ORBCOMM goes and has a record quarter for cash [it] kind of [bolstered] our ability to get this done.”
ORBCOMM closed the quarter with $76 million in cash, a record.
In its report, S&P said it saw long-term weaknesses in ORBCOMM’S business model for its satellite-based IoT. While rating the company’s B debt rating as “stable,” the ratings agency wrote that ORBCOMM was a “small-scale provider of internet of things solutions without a sustainable long-term competitive advantage.” It unfavorably compared its satellite network to those of Iridium communications. S&P also said there was a potential for big telecommunications companies like Verizon to get into the satellite-based IoT business.
But that wasn’t going to happen overnight and S&P said the company was “well-positioned within its niche to capture greater demand for IoT services.”
Wall Street appears to approve of ORBCOMM’s performance. As of midday Monday, ORBCOMM stock was up more than 87% in the past 52 weeks.