Halvorsen Industrial's 2029 notes now price a restructuring management says is not coming

There is a particular kind of silence that settles over an issuer when its bonds start trading on recovery value rather than on yield. Halvorsen Industrial Holdings reached that point some time in the last week of August. The company's 5.875% senior unsecured notes due 2029 changed hands at 57 cents on the dollar on Friday. At that price the instrument no longer behaves like a bond. It behaves like an option on how a negotiation goes.

Halvorsen makes industrial pumps, flow control valves and the aftermarket parts that keep both running. It is a good business in the sense that roughly 41% of revenue comes from aftermarket work at gross margins near 46%, and a difficult one in the sense that the original equipment half of the company sells into oil and gas capital budgets, mining expansions and municipal water projects that all move at once and all moved down together this year.

The stack, from top to bottom

The capital structure explains most of the price action. Halvorsen borrowed heavily in 2024 to fund the acquisition of a European valve business at a multiple the market disliked at the time and dislikes more now. The result is a stack in which the secured lenders sit comfortably, the unsecured holders sit at the fulcrum, and the hybrid and the equity sit somewhere between hopeful and notional.

Run the arithmetic that distressed desks run. If the enterprise is worth seven times a normalised $700m of EBITDA, the secured debt is covered twice over and the unsecured notes recover in full. If the enterprise is worth five times a stressed $600m, the secured lenders are still whole and the unsecured holders recover somewhere in the high fifties. The market has picked the second scenario and rounded it down slightly.

The decline was not one event. January through March was a repricing of the whole high yield industrial complex as the ten year Treasury backed up and index spreads widened. April and May were company specific: a first quarter miss, a guidance cut of about 9% at the midpoint, and an unusually defensive tone on the earnings call. Everything after June has been technical, which is the polite way of saying that long only credit funds stopped buying and the paper migrated to investors who price legal documents rather than cash flows.

What the covenant actually requires

The revolving credit facility carries a springing net leverage covenant that tests at 5.25 times when drawings exceed 40% of commitments. Halvorsen has drawn 75%. The first test date is 31 March 2027 and it uses trailing twelve month EBITDA as defined in the credit agreement, which permits addbacks for restructuring costs, acquisition integration and, up to a cap of 15% of adjusted EBITDA, run rate cost savings that management expects to realise within eighteen months.

The addback basket is the whole game here. On reported numbers they breach in March. On credit agreement numbers they pass by roughly a tenth of a turn, and passing by a tenth of a turn is not a position any treasurer wants to defend twice.

Delia Marchetti, head of credit research at Harrow Lane Capital

Marchetti's estimate matches ours. Take reported trailing EBITDA of about $712m as at the June quarter, add the $34m of announced restructuring charges, add roughly $28m of integration costs still flowing through cost of sales, and add the permitted portion of the announced $90m savings programme, and the covenant measure lands near $820m. Net debt after the June cash balance of $210m is $3.84bn. That is 4.68 times, which passes. The problem is that every one of those addbacks has to be earned back in the second half.

Three things that would change the picture

• A sale of the municipal water metering unit, which carries roughly $180m of revenue and which two trade buyers looked at in 2025. Proceeds of $600m to $750m would take gross leverage below four times and remove the covenant question entirely.
• An amendment that resets the covenant to 6.00 times in exchange for a pricing step up and tighter restricted payment language. Amendments of that shape have cleared the market this year at a cost of 75bp to 125bp on the revolver.
• A recovery in oil and gas capital budgets large enough to lift original equipment bookings, which fell 14% year on year in the June quarter and which management has guided to be roughly flat in the fourth.

None of the three is implausible. All three take time, and the time available is defined by liquidity rather than by patience. Halvorsen ended June with $210m of cash and $300m of undrawn revolver. Free cash flow in the second half is typically positive because working capital unwinds, and the company has guided to $120m to $160m. That gets the business comfortably into the summer of 2027 without drawing further. It does not get the business past the March test without one of the three items above.

The equity is telling a different story

Halvorsen shares trade at $14.20, down 38% this year, which values the equity at $1.86bn. That is not a zero, and it is not far from where a conventional multiple on stressed earnings would put it. Equity investors appear to believe that the aftermarket business alone supports the enterprise value, and there is a case for that: aftermarket revenue has fallen only 3% from its peak, the installed base is roughly 240,000 units, and replacement cycles do not wait for capital budgets.

You can hold both views at once without being inconsistent. The equity is worth something if the company refinances. The bonds are cheap if it does not. What you cannot do is assume the outcome is settled, because nobody involved has decided yet.

Owen Castellane, senior strategist at Bellweather Macro

That is the honest position. Halvorsen is not insolvent and its operating business is not broken. It is a leveraged industrial in the weak half of a cycle with a covenant test arriving before the cycle turns. Bonds at 57 do not say the company fails. They say the next conversation happens with lawyers in the room, and that the holders of $1.70bn of unsecured paper expect to pay for their seat at it.

Halvorsen reports third quarter results on 29 October. The number that matters is not earnings per share. It is the covenant EBITDA reconciliation buried in the back of the release, and whether the addback line is still growing faster than the business underneath it.