CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to rate Offshore Drilling Holding S.A.'s (ODH) proposed USD950 million senior secured debt issuance 'BB'. Fitch has also assigned foreign and local currency Issuer Default Ratings (IDRs) of 'BB-' to ODH. The Rating Outlook is Stable.
The company expects to use the proceeds from the issuance to refinance existing debt at its Centenario and Bicentenario subsidiaries. The one notch uplift for the proposed debt issuance reflects the expected above average recovery given default as a result of the strong collateral provided to the note holders.
Key Ratings Drivers
ODH's ratings reflect the company's solid commercial relationship with Petroleos Mexicanos SA (Pemex, IDR 'BBB+') as well as the relatively stable cash flow generation resulting from its contractual agreements. The ratings also reflect the nascent nature of ultra-deep water exploration in Mexico as well as the company's moderately high leverage, partial structural subordination and contract roll-over risk. The company's expansion plan is considered aggressive and adds to risk.
Solid Commercial Relationship with Strong Counterparty:
ODH's ratings reflect the company's, as well as its shareholder's, strong commercial relationship with Pemex. ODH and its shareholder provide off-shore drilling services, as well as other energy related maritime services, to Pemex. ODH currently owns three ultra deep water (UDW) sixth generation dynamic positioning drilling semisubmersible rigs. The company charters its assets to three operating affiliates that in turn lease the drilling rigs to Pemex's exploration and production subsidiary at day rates ranging from USD489 thousand to USD565 thousand. ODH is part of Grupo R, a privately held conglomerate of companies that have been providing drilling and oilfield services to Pemex for over 25 years.
Nascent UDW Exploration Phase in Mexico's Gulf Cost:
Although oil and gas production in Mexico has been concentrated offshore with approximately 75% of production during recent years, this has been mainly in shallow waters. Pemex has only recently focused in deep water and UDW exploration, mainly given the need to incorporate new reserves to offset declining production from matured fields. Pemex has drilled only 29 deep-water wells in its operating history. Development of possible reserves in this sector might be challenging as Pemex has limited experience in deep water oil and gas exploration. A shift back to only shallow and mid-waters exploration at the expense of UDW exploration could negatively impact demand for the UDW drilling rigs the company owns.
Moderately High Leverage:
ODH's expected gross leverage ratio for year-end 2013 is considered moderately high for the rating category at approximately 5.2 times (x). This is mainly the result of La Muralla IV only reporting nine months of operations during 2013. During 2014, leverage is expected to moderately decrease to 4.2x as EBITDA is expected to increase to approximately USD325 million from approximately USD227 million reported during 2012 once La Muralla IV reports a full year of operations. Thereafter, total consolidated leverage is expected to trend downwards and to range between 3.5x and 4.5x with the exception of years when the company adds financial debt to fund expected Jack-up acquisitions and until the new assets begin generating cash flow.
Partial Structural Subordination:
The proposed senior secured notes will be guaranteed by certain ODH's restricted subsidiaries, including Rubicon Drilling Services and Utileduci subsidiaries, which own the Centenario and Bicentenario drilling rigs, respectively, as well as first priority security interest, i.e. Ship Mortgages, against these assests; these two assets will have no debt following the completion of the refinancing transaction. The notes will also benefit from a 12 months interest reserve account. The notes will initially be structurally subordinated to approximately USD515 million of project-finance like bank debt related to La Muralla IV, which amortizes through 2018 and has a small balloon payment. Upon repaying all of La Muralla IV related debt, this asset will also guarantee the proposed debt issuance together with ODH's other subsidiaries. On a pro forma basis and giving effect to the proposed transaction, total consolidated debt is expected to be approximately USD1.5 billion and to be composed by the proposed notes and La Muralla IV debt. In the future, the company expects to add approximately USD850 million of debt, which could rank pari passu with the proposed notes, to acquire five Jack-up rigs to contract to Pemex.
Contracts Roll-over Risk and Adjustable Day Rates:
The company is exposed to contract renewal risk given that the three UDW drilling rigs have contracts that expire before the maturity of the notes. The rating incorporates the expectation that Pemex will re-contract these drilling rigs shortly before the contracts expire at average or marginally below average market day rates for similar assets as these UDW rigs are considered important assets for exploration of new oil fields in Mexico. The debt services reserve account mitigates contract roll-over risk as it would allow ODH time to relocate the assets if required. The contracts for Centenario and Bicentenario rigs have fixed day rates for the first two years and are then adjusted annually with average market rates for the remaining three years. The La Muralla contract, the third and last UDW drilling rig to enter commercial operation, has a five-year contract with Pemex at fixed day rates for the duration of the contract. The company's cash flow stability and predictability will benefit if contracts were to be renewed at fixed day rates for periods of five years or longer.
Aggressive Speculative Growth Strategy:
ODH's ratings incorporate the expectation that the company would continue to add offshore drilling equipment without increasing its leverage on a sustained basis. Currently, the company has construction orders for five shallow waters drilling rigs, or jack-ups, for which ODH is yet to sign contracts with Pemex. The company expects to sign contracts with Pemex for this equipment once they are in Mexico. Although the company has been operating this way in the past, this risk adds to cash flow uncertainty and high carrying cost should Pemex not contract the rigs and ODH is forced to find alternative markets for the equipment.
A negative rating action could be triggered by a combination of the following factors: ODH's consolidated leverage increases in a sustained basis to above 5.5x, contracts are not rolled over within six months after expiration, and/or the company faces delays of six months or greater contracting new equipment after it is delivered.
A rating upgrade could be considered under a combination of the following factors: ODH's leverage decreases below 3.5x in a sustained basis, and/or the company contracts all its drilling equipment under long-term contracts of no less than five years under fixed day rates and with very limited to none out-clauses.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage