Willscot's Debt Problem

We estimate that Willscot's has proportional debt of ~$25.7K per modular space unit on rent, but only $7.6K of cash flow left in its useful life. How will the ($18K) cash deficit to be filled?

Cash flows to repay debt are generated by the rental equipment. These modular space units were photographed on Willscot’s lot in Waldorf, MD in May.

Fleet age and utilization rate drive the fleet’s earnings.  We believe the fleet is 18-20 years old and the current low utilization rate cannot be increased, which truncates the earnings power significantly.  Analyzing WSC’s debt in the context of the rentable modular fleet and 3 to 6 year useful life shows what we interpret as a de facto undeclared bankruptcy for that segment. 

The best way, in our view, to analyze debt level and the company’s ability to service it is on a per unit basis, since debt can only be serviced by units that are rented and generate revenue. 

In the table below, we pro-rate the debt per unit on rent by using the current utilization rate, which cannot move materially higher because a significant portion of the fleet is unfit for service.  We then assume an $850/month rental rate for the base unit and an EBITDA margin of 40%.  The remaining fleet life determines the overall earnings power.

The model assumes a 24-year useful life, annual interest rate of 6%, and bullet debt repayment at the end of the period.  Maintenance cost is assumed to be zero for the remainder of fleet life. 

Despite generous assumptions, both scenarios (3 and 6 years fleet useful life remaining) result in is a cash deficit.  Any salvage value would have to be in excess of the deficits to reach full debt coverage.  This is highly unlikely as we believe there is no secondary market for 24-year old units.  The break-even to repay the debt would be a fleet with 10-years of life remaining, which we believe is a statistical and observational improbability.