The provider of Barrett Business Services’ (Nasdaq: BBSI) primary $16.5 million revolving credit facility has put significant restrictions on the company’s borrowing according to statements in Barrett’s just filed 10Q. Barrett cannot draw on its revolving credit facility to fund its reserves and is barred from repurchasing any of the outstanding shares of its common stock – a common practice to boost a sagging stock price.
The company also warns in its filing that it may not be able to develop a reserve-funding plan that is ultimately acceptable to Wells Fargo or to generate financial results in the future that will keep it in compliance with the lending covenants, or in fact, to be able to borrow to cover it’s reserves.
BBSI has been responding to questions about potential liabilities for employer clients by telling brokers and others that it has a bond on file with the State of California’s Office of Self Insured Plans. However, the company refused to answer questions for Workers’ Comp Executive as to either how much it’s California reserves are, how much the California deficit is, nor how much the bond covers.
But under reserving is under reserving and there is nothing in any of its filings to indicate how much of its $80 million under reserving is in any particular state. Approximately 77% of Barrett’s revenue, it says, is tied to its California. All things being equal, simple math (which might not apply and which could be better or worse) indicates that under reserving in California is approximately $61.6 Million. In the Mainstay Self insured PEO failure employers have been sued by the Self Insurance Security Fund to recover losses.
It is unknown if BBSI’s significant liquidity concerns will have an effect on either the decision to or its ability to pay safety bonuses, a key part of its sales pitch. It is also unknown, if it – or if some court later – will seek to recover from employers safety bonuses already paid on what may now be short reserves. But it is a question – worth considering.
The company’s late-filed 10Q reveals that its recognized increase in workers’ comp liabilities put it in violation of several financial covenants attached to the credit facility provided by Wells Fargo, but it has reached a temporary delay with the lender.
“On November 10, 2014, the Company reached an agreement with the Bank pursuant to which the Bank has agreed to waive the covenant violations in exchange for payment of a waiver fee of $20,000 and a requirement that the Company present a plan acceptable to the Bank by December 31, 2014, addressing the Company’s workers’ compensation reserve funding requirements,” Barrett revealed in the filing with the Securities and Exchange Commission.
The announcement is silent on whether Barrett will be able to draw on the facility, if needed, should the Office of Self Insurance Plans move to increase its security deposit for its workers’ comp obligations in California. OSIP is legally barred from discussing the situation. Barrett refuses comment as to if or when that deposit will be increased.
Should Barrett not file an acceptable reserve funding plan in the eyes of it lender, Wells Fargo Bank, it says in its 10Q that “This would result in our being in violation of the Agreement, causing us to be unable to draw on the revolving credit facility to meet our liquidity needs, including for purposes of funding a portion of our insurance reserves,” the company warns. “In this event, we would seek to establish a replacement credit facility with one or more other lenders, including lenders with which the Company has an existing relationship, potentially at less desirable terms.”
“There can be no guarantee that replacement financing would be available at commercially reasonable terms, if at all,” it says in its filing.
Filed by Brad Cain in San Francisco and Dale Debber in Sacramento.