EXTN - Exterran 8.125% 2025: Likely To Be Called Above Par Soon

Summary

• Enerflex issued circular to it shareholders, achieving another big milestone to close the Exterran acquisition.
• Enerflex will need to issue a Change of Control offer for the Exterran 8.125% 2025 notes.
• Enerflex has committed financing in place to refinance Exterran's debt.
• The bond is expected to be taken out before the end of the year at $101-102.
• CUSIP: 30227KAE91.

Situation Overview

Enerflex ( EFX:CA ) announced its acquisition of Exterran ( EXTN ) back in January in an all-stock transaction. Enerflex and Exterran have obtained all major regulatory approvals and shareholder votes (for both Enerflex and Exterran) are scheduled for October 11, 2022.

There is committed debt financing in place to refinance the entire capitals structure of the combined entity - a new $700 million RCF and a $925 million bridge loan, which will be used to refinancing the Exterran debt according to the circular filed on SEDAR.

The fact that circular/proxy statement and F-4 are filed indicates that the management team believes that achieving the required shareholder vote on both sides, which is the remaining key condition to the acquisition. In addition, Chai trust which owns 24.5% of Exterran stock, and all the directors and executive officers that collectively hold ~4% of the stock entered into voting agreements in favour of the merger. The only wildcard is whether the Enerflex shareholder will approve the deal (via agreeing to issue new shares to Exterran shareholders).

From existing Enerflex's shareholder perspective, I believe the transaction rationale seems logical (scale, cost synergy, more recurring gross margin) and the deal metrics are accretive in terms of cash flow per share. I also didn't find the top shareholders publicly oppose this transaction.

Exterran 8.125% 2025

This transaction should trigger the Change of Control clause:

This means post transaction the Enerflex is required to issue a $101 change of control offer to the bondholders, who may or may not sell into the offer. The bond is also callable at ~$102 today. Enerflex could first try the change of control offer to see how many bondholders take the $101 price, and then call the rest at $102. Alternatively, Enerflex could run a separate tender offer at a price between $101-102, while asking for consent to waive the change of control offer requirement. If I'm advising Enerflex, I'd tell them to just call all the bonds at $102 to have a clean process and build some credit with the credit community as Enerflex may need to come back to the market to refinance the bridge loan in the future.

The bonds are offered below par. In the least favourable scenario that bondholders put the bonds back to Enerflex at $101, at $99.5 the yield to end of the year is +13%.

Conclusion

There is a little bit of uncertainty with the Enerflex shareholder vote and the treatment of the bond but in my opinion this is a done deal. I believe shareholders approval on both side will be achieved on October 11 and the bond might even be conditionally called soon.

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