Fitch Revises Outlook to Negative for Brazilian Oil Vessel-Backed Financings

CHICAGO--()--Fitch Ratings has affirmed ratings assigned to the following Brazilian oil-vessel backed transactions and revised the Rating Outlook to Negative from Stable:

Odebrecht Offshore Drilling Finance Ltd.

-- Series 2013-1 Senior Secured Notes due 2023 at 'BBB';

-- Series 2014-1 Senior Secured Notes due 2023 at 'BBB'.

Odebrecht Drilling Norbe VIII/IX Ltd.

--Series 2010-1 Senior Secured Notes due 2022 at 'BBB'

SBM Baleia Azul, SII/ S.a.r.l.

-- Series 2012-1 Senior Secured Notes due 2027 at 'BBB'.

Schahin II Finance Company (SPV) Limited

--Series 2012-1 Senior Secured Notes due 2023 at 'BBB-'.

Lancer Finance Company Ltd.

--Series 2010-1 Senior Secured Notes due 2016 at 'BBB-'.

QGOG Atlantic/Alaskan Rigs Ltd.

--Series 2011-1 Senior Secured Notes due 2019 at 'BBB-'.

Most of these transactions are backed by cash flows related to one or more long-term charter agreements with Petroleo Brasileiro S.A. (Petrobras) for the use of ultra-deepwater (UDW) drilling rigs. SBM Baleia Azul, SII/ S.a.r.l. is backed by flows related to charter agreement with Petrobras for the use of a floating, production, storage and offloading unit (FPSO), called Cidade de Anchieta, for a period of 18 years. QGOG Atlantic/Alaskan Rigs Ltd. is supported by flows related to two charter agreements with Petrobras for the use of two mid-water semi-submersibles.

KEY RATING DRIVERS

The revision of the Rating Outlook to Negative from Stable reflects a combination of factors, including: a potential weakening of several of the related entities and their economic groups and uncertainties related to investigations of Petrobras' contracting practices; and potential pressure on global day rates and asset values caused by oil price declines. The impact of these factors varies depending on the characteristics of each individual transaction.

The ratings continue to be supported by Brazilian offshore supply/demand fundamentals, which favor the vessels backing these transactions. In Fitch's view, the existing fleet of contracted offshore vessels is essential to the overall production growth strategy of Petrobras and Brazil, mitigating the risk of contract interference. Limited local supply of drillships is further constrained by the delayed delivery of 28 new drillships (Sete Brasil).

Fitch has seen some deterioration within the various groups sponsoring these transactions. The Outlook revision to Schahin II Finance Company (SPV) Limited and Lancer Finance Company also reflects the recent negative rating action to holding company Schahin Oil and Gas Ltd (Schahin O&G), part of Schahin Group. On Nov. 17, 2014, Fitch downgraded the IDRs assigned to Schahin O&G to 'B+' from 'BB-' and revised the Outlook to Negative from Stable due to higher leverage and tighter liquidity.

Additionally, on Nov. 19, 2014, Fitch placed all the Brazilian heavy construction companies, related parties to some of the oil vessel-backed financings on Rating Watch Negative. This action reflects Fitch's concerns about the financial and business impact on these corporates of corruption allegations regarding contracts between Petrobras and multiple companies in the sector. Two affected heavy construction companies Construtora Norberto Odebrecht S.A. and Construtora Queiroz Galvao S.A., are not sponsors of oil vessel-backed transactions, but rather related companies that could negatively impact the financial condition of their respective economic groups.

Although drilling companies have not been mentioned in the ongoing investigations, a ruling against the implicated companies could lead to Petrobras and the Brazilian government investigating contracts with related entities, including the long-term charter agreements backing these transactions. Ultimately, Fitch believes Petrobras' incentive to terminate these charter agreements is very low, as contracted day rates are generally at or below global market day rates and the chartered vessels are essential to the development of Brazil's national oil sector.

More specific to SBM is the ongoing investigation related to certain contracts with Petrobras. While this has been an ongoing issue, scrutiny has intensified as Brazilian government authorities have re-opened these investigations because of new information provided by Dutch authorities. While these investigations may have a negative impact on SBM's future business within Brazil, Fitch believes that Cidade de Anchieta remains a valuable asset for Petrobras and will not likely be affected by the investigations. The Negative Outlook will be resolved once there is more clarity regarding this issue.

In general, Fitch believes the charter day rates within the rated portfolio remain attractive compared with global market rates; however, if the recent collapse in oil prices persists, it will continue to put pressure on market day rates and asset values. While the transactions are not directly exposed to market day rates as the contracts in place continue to have seven to eight-year remaining terms, a contract termination would expose the transactions to such rates. Fitch's long-run view on oil prices and UDW supply/demand fundamentals should continue to support charter rates and asset values within the UDW segment in the long term.

Asset Performance Update

QGOG Atlantic/Alaskan Rigs Ltd.

During 2013 and the first half of 2014 (1H'14), performance of both Atlantic Star and Alaskan Star was stable with uptime levels at or above 99%. Despite strong performance of these assets, mid-water semi-submersible assets have seen recent pressure on global utilization, day rates, and therefore asset values. The recent drop in oil prices may exacerbate this issue and potentially make these charter agreements vulnerable. This is significantly mitigated as the transaction continues to de-lever and net loan-to-values (LTVs) have decreased, providing sufficient protection to investors.

Odebrecht Offshore Drilling Finance Ltd. and Odebrecht Drilling Norbe VIII/IX Ltd.

Assets backing the Odebrecht transactions are designed for UDW and are the backbone of Petrobras' production growth. Although day rates have seen some decline within this segment, they remain comfortably above the current charters in place. Odebrecht-sponsored transactions have shown volatile uptimes due to the ramp-up period for certain assets and the extended operational learning curve. Fitch expects uptime levels to stabilize in the medium term and will continue to monitor performance of the vessels.

SBM Baleia Azul, SII/ S.a.r.l. (Cidade the Anchieta)

During 2014, Cidade the Anchieta has operated at an average oil uptime level exceeding 99% (in line with Fitch's expectations and SBM's excellent track record) and daily production has averaged approximately 85,000 barrels (representing approximately 4% of Petrobras' production).

Lancer Finance Company Ltd. and Schahin II Finance Company (SPV) Limited

During 2013 and 1H'14, S.C. Lancer operated at uptime levels exceeding 99%. While this particular asset is older and not designed for UDW drilling, the transaction continues to de-lever and benefits from significant cash reserves. Schahin II Finance Company (SPV) Limited is backed by the UDW drillship Sertao. Uptimes have been fairly strong (excluding some isolated incidents at the end of 2013 and 2Q'14). Fitch expects performance levels to return to historical levels, which have been well over 95%

RATING SENSITIVITIES

The transaction ratings are sensitive to changes in the credit quality of Petrobras as offtaker. The foreign currency (FC) Issuer Default Rating (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 ratings are 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 debt service coverage ratio (DSCR) expectations and potentially result in rating downgrades.

Finally, the transaction ratings may be sensitive to a significant deterioration of the credit quality of the various sponsors. In the case of Schahin II Finance Company (SPV) Limited and Lancer Finance Company Ltd, further downgrades to Schahin Oil and Gas Ltd's IDR may result in a downgrade to the notes.

The ratings may also be sensitive to the outcome of the Petrobras investigations and any potential impact on the oil and gas industry. Fitch will continue to monitor these issues.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research

- Global Structured Finance Rating Criteria (Aug. 4, 2014);

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

- Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (May 28, 2014);

- Petrobras Ratings Sensitivity Analysis (Dec. 2, 2014);

- Fitch: Petrobras Corruption Scandal Pressuring Credit Quality (Dec. 2, 2014);

- Fitch Downgrades Schahin O&G's IDRs to 'B+'; Outlook Negative (Nov. 17, 2014).

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754389

Criteria for Rating Oil Vessel-Backed Financing in Latin America

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=728818

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781

Petrobras Ratings Sensitivity Analysis (Credit Metrics to Pressure Credit Quality)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821050

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=943735

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Contacts

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

Contacts

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