Fitch Affirms Schahin II Finance Company (SPV) Ltd. Notes at 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Schahin II Finance Company (SPV) Limited's series 2012-1 notes as follows:

--US$750 million senior secured notes at 'BBB-'; Outlook Stable.

The notes are backed by the flows related to the charter agreement signed with Petroleo Brasileiro S.A. (Petrobras) for the use of the dynamically positioned ultra-deepwater (UDW) drillship called 'Sertao' for the term of 10 years. Schahin Petroleo e Gas S.A. (Schahin P&G), the oil and gas arm of Brazilian-based Schahin Group (Schahin), is the operator of the vessel and primary sponsor of the transaction. Charter collections include rights to residual cash flows (dividends) released by the owner of the Cerrado vessel, which is a Schahin-operated rig of the same design as Sertao.

Fitch's rating addresses the timely payment of interest on a semiannual basis and the ultimate payment of principal by legal final maturity.

KEY RATING DRIVERS

The rating affirmation reflects the following key rating drivers:

Positive Supply and Demand Fundamentals: The Federal Government of Brazil and Petrobras have passed several initiatives seeking the development of the local oil and gas industry. UDW rigs are essential assets for continued research and development of new oil fields in Brazil. Investments by Petrobras and regulation/legislation imposed by the government should continue to provide a stable credit environment for sponsors and protect value of these assets.

Credit Quality of the Offtaker: Fitch's view of the offtaker's credit quality is the implied rating cap for a drilling rig transaction in which the offtaker is the main source of cash flow generation. Petrobras carries local currency (LC) and foreign currency (FC) Issuer Default Ratings (IDR) of 'BBB'/Outlook Stable. The company is controlled by the federal government of Brazil and has the rights to exploration and production (E&P) of the vast majority of Brazil's oil fields.

Strong Operating Performances: Sertao operated at 94.6% uptime in 2013 in line with Fitch's expectations for long-term performance and exceeding Fitch's expectations for performance during the ramp-up period. Last year, Sertao's daily operating expenses (OPEX) averaged $116,715, below projected expenses during the rig's first five years of operation. Cerrado operated at 95.9% uptime in 2013. Schahin shows a consistently high uptime performance on its overall rig portfolio.

Adequate Leverage and Liquidity: On a net senior debt basis, Fitch's adjusted valuation of Sertao indicated an initial loan-to-value (LTV) ratio of 68%; this figure has started to decrease as the transaction de-levers. The senior semiannual debt service coverage ratio (DSCR), considering charter agreement revenues (excluding Cerrado dividends) net of transaction fees and OPEX, divided by debt service for the semiannual period, averaged 1.64x over the last two periods. In addition, the transaction benefits from liquidity reserves covering one semiannual principal and interest payment and three months of OPEX.

Operator Credit Quality: The main sponsor of this transaction, Schahin P&G, is a sister company of Schahin Oil & Gas Ltd (Schahin O&G) ('BB-/Negative'). On Jan. 24, 2014 Fitch affirmed the rating of Schahin O&G at 'BB-' and revised the Outlook to Negative from Stable. Fitch believes the 'BBB-' rating assigned to the structured financing continues to be supported by the transaction's current leverage and strong performance metrics, the current secondary market for similar vessels, and the ample supply of qualified replacement operators should Schahin need to be replaced.

RATING SENSITIVITIES

The transaction rating is sensitive to changes in the credit quality of Petrobras as offtaker. The FC IDR assigned to Petrobras acts as the implied cap to the rating of this transaction as Petrobras is the offtaker and main source of cash flow generation. In addition, the rating is sensitive to the operating performance of the rigs. Extended periods of downtime that lead to the revision of Fitch's uptime assumption of 95%, would result in lower DSCR expectations and potentially result in rating downgrades. Finally, the transaction rating may be sensitive to a significant deterioration of the credit quality of Schahin that may affect its ability to service and maintain Sertao.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (May 24, 2013);

--'Criteria for Rating Oil Vessel-Backed Financing in Latin America' (Jan. 14, 2014).

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708661

Criteria for Rating Oil Vessel-Backed Financing in Latin America
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=728818

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823911

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Gregory Lane, +1-312-606-2304
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Cinthya Ortega, +1-312-606-2373
Director
or
Committee Chairperson
Greg Kabance, +1-312-368-2052
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Gregory Lane, +1-312-606-2304
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Cinthya Ortega, +1-312-606-2373
Director
or
Committee Chairperson
Greg Kabance, +1-312-368-2052
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com