Operating with a pile of debt and weakened liquidity, private equity-backed Aquilex Holdings LLC broke financial covenants at the end of the third quarter and has until Dec. 8 to negotiate a fix with its lenders, the company said.

The Atlanta industrial services company, controlled by Teachers' Private Capital, the private equity arm of Ontario Teachers' Pension Plan, agreed to a forbearance with administrative agent Royal Bank of Canada, during which debtholders will not exercise default-related rights and remedies against it, according to a Tuesday, Oct. 18, filing with the Securities and Exchange Commission.

Aquilex, a provider of repair and overhaul services and industrial cleaning services to the energy and power generation sectors, breached its total leverage ratio, interest coverage ratio and senior secured leverage ratios under its credit agreements.

Pricing on the company's loans rose by 1%, from LIBOR plus 450 basis points with a 1.5% LIBOR floor previously, according to Standard & Poor's Leveraged Commentary & Data. the company also agreed to pay a $250,000 fee to lenders, the filing said.

Aquilex's revenue and earnings dropped in 2010 primarily due to weak demand in its markets, deferral of several customers' maintenance projects and cost management problems, according to filings and analysts' reports.

In 2011, according to Moody's Investors Service, Aquilex developed a cash operating deficit because a key foreign customer that owes more than $10 million began slowing payments. Moody's said in late August that it downgraded the company to Caa2, from B3. S&P lowered its corporate credit rating on Aquilex to CCC+ from B.

Aquilex posted negative Ebitda of $114.9 million on revenue of $461.8 million in 2010, compared with $32.5 million of Ebitda on $480.9 million in revenue in 2009.

As of December, the company had $27.4 million net cash, but Moody's said its revolver is fully drawn. Long-term debt stood at $379.2 million.

While the company's industrial cleaning services segment is restructuring, "the effort seems ill-timed," Moody's said, and lower margin levels prevailing in the first half of 2011 "will probably continue into 2012."

Teachers' acquired Aquilex in December 2008 for an undisclosed amount, though reports pegged the transaction at about $913 million at the time.

In March 2010, the company said it obtained financing worth $235 million to refinance the $310 million senior debt that backed the buyout.

Earlier this year it agreed to an amendment that raised the applicable coupon by 50 basis points, among other measures aimed at giving it additional head room to maintain debt covenants. At the time, Aquilex paid a one-time amendment fee of 25 basis points to participating lenders as well as arranging fees to the lenders, Royal Bank of Canada and Morgan Stanley Senior Funding Inc.

Covenants in Aquilex's amended credit agreement require the company to maintain a minimum interest coverage ratio ranging from 1.55:1 to 1.95:1 over the term of the agreement; a maximum leverage ratio ranging from 6.75:1 to 4.85:1 and a maximum secured leverage ratio ranging from 3.00:1 to 2.50:1, according to filings.