WSC: Occam’s Razor and Boswell’s Bombshell

It seemed like adding the $525M of maturing debt to the ABL was a done deal - until it wasn't; and is the aged-out fleet actually a competitive advantage? We think not.

A unit that has likely been on a WSC lot for many, many years.

It is important that investors review the Disclaimer at the end of this post.

We were outlining a summary of why we believe WSC’s investor day went so poorly when the company announced a $500M note offering to repay the bulk of the $525M due in June 2025. The offering came as a surprise to us as management had strongly signaled that the maturing debt would be added to the ABL. The sudden change in direction suggests to us that ABL lenders may have cut the company’s access to credit, requiring WSC to pay the higher rates of the second lien junk market.

The debt gambit is only the most recent surprise. President and Chief Operating Officer Tim Boswell dropped what we consider to be a bomb during the investor day presentation. He went on at length explaining how the “idle fleet” is being “parked” because it can be remanufactured into cash generating usable assets. However, we view the remarks a de facto admission that much of the fleet is scrap requiring material CapEx to be made viable.

In our view, Mr. Boswell’s remarks support the point we have been making for some time: The cash generating capability of Willscot’s modular fleet is exhausted. The difference now is that management has intimated the same and it looks like others may be coming around to our view.

Occam’s Razor, the theory of parsimony, states that in searching for an explanation one should prefer the one that requires the fewest assumptions. Investors may believe the detailed explanation of why an apparently old, undermaintained fleet is actually a valuable asset. However, our simple working hypothesis is that the fleet was neglected, the cash is gone, but the debt remains.

Did WSC’s ABL lenders cut access to credit?

In our last post on WSC, Willscot’s Debt Reckoning, we assumaed that management would add the $525M of maturing debt to the company’s ABL loan. We believed this was the case because management had repeatedly stated that they may due so. In 1Q24, then President and CFO Tim Boswell stated “We have ample liquidity to refinance our 2025 notes at any time to optimize interest costs.”

The ABL was the central source of liquidity cited by management throughout the year. The 3Q24 10-Q states that “the Line Cap was $3.2 billion and the Company had $1.7 billion of available borrowing capacity under the ABL Facility, including $1.5 billion under the US Facility”.

As of 3Q24, the ABL rate was 5.4% (5.33% as of 4Q24). Only the 2028 notes are lower at 4.625%, and the 2025 debt is 6.125%. It would make financial sense to refinance the maturing notes at the lower ABL rate. Therefore, it was not a surprise when on the 3Q24 conference call, Mr. Boswell reassured the markets of the company’s ability to repay the debt stating: “I'll note our 2025 senior secured notes mature in June next year. We have ample liquidity available to simply draw on our ABL revolver and repay the 2025 notes.”

All mention of refinancings and the ABL disappeared after the 3Q call. The 4Q24 conference call was the only 2024 earnings call where refinancing and the ABL were not discussed.

We believe the timeline of events suggests that refinancing maturing debt on the ABL was not mentioned on the 4Q24 conference call, because the ABL lenders withdrew support.

What might have happened between the 3Q24 call when adding the debt to the ABL seemed all but a done deal and today when WSC is refinancing that debt at a higher rate?

One potential factor is that some lenders may have been reading our research. We published three pieces in 2H24 on WSC. We like to believe that some investors reading our work have begun come around to our view that WSC has a deeply flawed business model.

Our working hypothesis is that the ABL lenders saw our site reports and concluded that WSC’s equipment was not worth the Line Cap of $3.2B and have de facto withdrawn much of the $1.7B in available credit. In our view, the timeline suggests it is so, and why would secured lenders approve a significant increase in debt without a commensurate increase in equipment? After tall, they know management is going to use the cash to repurchase stock. That does not play to their interests.

The announced deal was priced at 6.625%, a 130 basis point increase over the year-end ABL pricing of 5.33%. We believe management would likely have taken the lower pricing if it were on offer.

The pricing is consistent with the company’s June 2024 offering. S&P rates the 2029 bonds at BB-, ‘speculative’, one notch above ‘highly speculative’ and a few notches above the “C” range.

Assuming the deal closes, the company will have averted a potential June 2025 debt crisis. However, the junk rating, higher rates, and apparent withdrawal of ABL funding speaks volumes. If we are correct and the first lien lenders won’t lend much more, and second lien corporate lenders consider the paper deep junk, what is the equity worth?

“Don’t get distracted by utilization”

Som Das, VP Logistics, was the first to mention the fleet during the investor day presentation. He said, “our idle fleet has the ability to support $600 million of revenue growth with only 20% of the cost versus purchasing new fleet”. Tim Boswell repeated Mr. Das’ fleet assertions later in the meeting.

We estimate the average age of the fleet is likely ~20-years and much of it in too poor a condition to rent. Management’s assertion that the “idle fleet” can generate $600M of potential revenue at 20% of the cost of a new fleet appears to be an attempt to reposition the poor fleet condition as a competitive advantage. The idea cannot withstand scrutiny.

The cost comparison should be with a well-maintained unit of average age, not a new unit. The remanufactured unit is not new. Despite the best efforts of the refurbishment team, an old unit is still and old unit. According to anecdotal evidence customers notice and are not happy about it.

Mr. Boswell extensive justifications for the fleet did not help his case, in our view. One participant asked about assumed utilization rates in guidance and fleet growth.

Initially, CFO Matt Jacobsen provided an answer, sidestepping the utilization part of the question. However, Mr. Boswell chimed in, discouraging the analyst from thinking about utilization as a single number, but broke it into the two constituent parts – units on rent and total units. Mr. Boswell dealt with volume quickly saying expectations were modest growth 0-2% annually. But he focused intently on total units, stating that “what we do with the idle fleet is a different question, right?”

It’s worth looking at Mr. Boswell’s longer reply in detail:

“As long as we assume over time that there's going to be enough market demand to absorb that fleet over a 3-plus-year period, because of that refurbishment capability that we just talked about, it's way more capital efficient for us to just hold that fleet. We're parking it. We're taking it out of the market effectively. We don't price based on utilization. And we can bring that back into a service when demand comes back and unit on rent warrants for 1/5 the cost of buying a new unit, right? So don't get distracted by utilization.”

Mr. Boswell’s admonishment that investors “not to get distracted by utilization” makes sense because that fleet does not exist in the same sense it does for competitors. His remarks suggest that the “idle fleet” is actually scrap with some salvage value; that the company does not have units ready to rent. It has units management says it can remanufacture into rentable equipment at what it believes to be an economically viable price. That is not a fleet. That is an inventory of potential spare parts.

The implications of the remarks are profound within the context of an equipment rental business.

The modular rental business has a cash flow life-cycle. Debt and equity finance the purchase of a unit. Over the ~20-year useful life of the unit, net positive cash flows adjusted for maintenance need to both provide a return on investment for the equity holders and repay the debt. Mr. Boswell’s remarks appear confirm what we have long contended – that much of the 60,000 idle modular units implied with the utilization rate are unrenatable. Value can only be generated by adding material amounts of CapEx to process the scrap, in our view. The debt incurred to finance the “idle fleet” should have already been paid-off, but it has not been.

Mr. Boswell also made an assertion that does not square with our research. He stated that if there is “enough market demand to absorb the fleet over a three-plus year period, it made economic sense to “park it”. Documentary evidence does not suggest that is happening on a large scale.

We have published photographs that suggest units sit on lots for years without being rented, sometimes decades. As an example, we extracted the image below from our Willscot Site Survey Report. It shows a GE Capital unit acquired in 2007. Because the branding was never change, we believe it is highly unlikely that this unit rented since acquisition.

Taking Mr. Boswell’s statements at face value would imply that over the next three or so years, demand will increase such that this unit that has been sitting on a lot in Seattle for almost 20-years will be drafted into service. We are skeptical. We believe odds are that GE unit will still be there in 3-years.

The conclusion is a sharp edge

The central question is: has Willscot diverted cash needed to renew and maintain the fleet in order to “returned capital to shareholders”, as we contend, or has the company refined the traditional equipment rental model by warehousing old equipment and generating remanufacturing skills, as management seems to imply.

Investors may believe management’s detailed explanation of why the seemingly ancient “idle fleet” is actually a valuable asset, a competitive advantage that can be monetized at will. However, Occam’s Razor suggests that the simplest explanation with the fewest assumptions is often preferable. Our simple working hypothesis is that the cash has been spent and shareholders are now left with a lot of debt and a fleet that cannot service it.

DISCLAIMER

This report represents the opinions of Keith Dalrymple and Dalrymple Finance on Willscot Mobile Mini. It is an opinion piece and should not be taken as investment advice of any kind. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.

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