Ratings agency Moody's has reported that mining services company Emeco Holdings Limited (ASX: EHL) is at high risk of defaulting on its debt in the next 12 to 18 months.
In a report by Moody's analysts today, ASX-listed Emeco and private equity-owned Bis Industries are carrying high levels of debt and will remain under pressure as conditions in the sector continue to worsen.
That's something we expect to see as well. Miners continue to cut capital expenditure and force down costs. Those contractors lucky enough to secure contracts will likely be forced to operate on razor-thin margins, with some likely to finish at a loss – like WDS Limited (ASX: WDS) reported yesterday.
As The Australian reported today, Moody's analysts said that mining services groups are being squeezed by mining companies, cutting capital spending and using their renewed bargaining power to renegotiate existing contracts on better terms for the miners – and worse terms for contractors.
As WDS also reported yesterday, they are in breach of their debt covenants and are likely having urgent talks with their bankers.
We haven't seen blood in the streets in the mining services sector yet, but it could be coming. Importantly, investors might want to avoid any mining services companies with substantial amounts of debt on the balance sheet.
WDS, Emeco, Hughes Drilling Limited (ASX: HDX), Cardno Limited (ASX: CDD), Boart Longyear Limited (ASX: BLY) and Ausdrill Ltd (ASX: ASL) could be among the companies to watch thanks to their relatively large debt levels.
