US Silica is one of a slew of energy-related credits that have been riding high recently thanks to elevated oil prices. But with the energy downturns of 2015 and 2020 still fresh in investors’ minds, prospective lenders are cautious about adding any exposure to the space as the company pitches a new refinancing term loan.

The frac sand and commercial silica producer is benefiting from strong demand from energy exploration and production companies — chief executive Bryan Shinn described market conditions last year as “sandemonium” as oil and gas drillers paid top dollar for the company’s products to keep up with energy demand.

This is a big turnaround from the commodity price slump of 2020 that sparked a wave of bankruptcies among US Silica’s peers in the proppant industry, including Hi-Crush, Covia, and Vista Proppants & Logistics.

Having survived, US Silica has used excess cash flow to pay down debt — and is now going to lenders with a more attractive leverage ratio to refinance its existing loan. 

It is also pitching a more diversified business model. After deciding against offloading its industrial business in 2021, it’s now pitching the segment as a selling point. The unit makes industrial materials for industrial purposes outside the energy sector, such as building materials or filtration products, and generated around one-third of the company's total sales in 2022.

"The pitch is they've delevered and moved away from frac. They make a decent enough case and should be able to get something done. They bought back $250m of debt so it's a clean story," said a portfolio manager. 

The company repurchased $150m of debt in 2022 and is on track to reduce debt by another $100m with the refi transaction, according to S&P.

US Silica (B2/B-) on 2 March launched a $950m term loan B due 2030 via lead arranger BNP Paribas. Pricing on the loan is talked at SOFR+475bps (0.5% floor) with a 97-98 OID, and commitments are due on 16th March (Thursday) 12 pm EST. 

Proceeds, along with cash from the company’s balance sheet, will be used to refinance a term loan B due 2025, which had $1.057bn outstanding as of December 31, 2022. The financing will also extend the maturity on US Silica’s undrawn $100m revolver from 2023 to 2028. 

While the getting is good

Strong cash flow generated from the oil and gas proppants segment, which provides fracturing sand for oil and gas wells, has helped US Silica attract investors.

"It has been a very good year for the frac sand industry given what's going on in the energy industry. So I think they're taking advantage of that in order to refinance their existing loan," said another portfolio manager.

The company had $280.8m of cash at the end of 2022.

"Leverage is pretty low and they're sitting on a fair amount of cash," said a CLO manager. "Based on the outlook it feels like they're in a pretty good spot and even if things go badly the debt is covered, plus companies in that sector are more disciplined than they were."

US Silica is marketing the new loan on pro forma net leverage of 2.3x and 3.1x on a gross basis, according to a source. It posted $353.6m in adjusted EBITDA last year, according to filings. 

Moody’s estimated US Silica’s total debt-to-EBITDA ratio to be 2.8x in 2023 and S&P projected adjusted leverage of close to 3x.

The company plans to bring net leverage under 2x this year. Company CFO Don Merril called that goal “very achievable” on its 4Q 2022 earnings call last month.

The NYSE-listed company has a market cap of $924.1m.

The last one at the party

But as multiple energy downturns have showed, price cycles are unavoidable.

"You have to keep in mind that this is a very volatile business. 2022 earnings is like the peak. So it's really a question: are these earnings sustainable?" said the second portfolio manager.

That’s a question that some CLO managers are considering as they ramp warehouses, even if energy was the darling of leveraged finance markets last year and companies in the sector are broadly perceived to have improved their balance sheet discipline.

"No one managing CLOs is going to be making a big push in energy, just because of the cyclicality of it," said the CLO manager.

US Silica and BNP Paribas did not respond to a request for comments.