Fitch: No Immediate Negative Impact On QGOG Constellation's Ratings Following Action on Affiliate

CHICAGO--()--Fitch Ratings sees no immediate negative impact on QGOG Constellation S.A.'s (Constellation or HoldCo) ratings following the recent negative rating action taken on Construtora Queiroz Galvao S.A. ( rated 'AA-(bra)'; Rating Watch Negative by Fitch) and QGOG Atlantic/Alaskan Rigs Ltd.'s Sr. Secured Notes (rated 'BBB-'; Outlook Negative].

On Nov. 19, 2014, Fitch placed the ratings for Construtora Queiroz Galvao S.A., an affiliate of Constellation, on Rating Watch Negative following the corruption investigations surrounding the former entity's contracting practices with Petrobras. On Dec. 5, 2014, Fitch revised the Outlook for structured finance transactions related to Petrobras' contracts to Negative from Stable, including QGOG Atlantic/Alaskan Rigs Ltd.'s Sr. Secured notes, as a result of the increased uncertainty related to Petrobras' contracting practices investigation, coupled with the pressure on day rates and asset values caused by oil price declines.

Fitch currently rates Constellation 'BB-' with a Positive Rating Outlook. The Positive Outlook reflects the expectation of partial elimination of structural subordination as some operating companies' (OpCos) debt is paid in full over the next two years coupled with continuing deleveraging.

During 2014, the Olinda Star drill rig became the first of the company's operating assets to pay its debt in full, which improved cash flows to the holding company. Over the next two years, at least two additional assets may fully repay their OpCo level debt, further improving cash flows to the holding company and eliminating structural subordination.

Constellation's credit quality is somewhat insulated from deterioration on the credit quality of its shareholders given the HoldCo's debt covenants that limit restricted payments, including dividend payments, should net leverage exceed 4.75x by December 2015 or 3.75x thereafter. On Fitch's base case, Atlantic and Alaskan were not projected to distribute cash to the HoldCo until the structured finance notes are paid in full.

Constellation's credit quality also benefits from asset diversification as the company currently operates nine offshore and nine onshore drilling rigs in Brazil. Fitch will review Constellation's ratings should a formal investigation be launched on the company's contracts with Petrobras.

Constellation ratings could also be negatively affected by the following: failure to lower leverage to below 4.0x; pressure on credit metrics as a result of an aggressive growth strategy; or deterioration of Petrobras' credit quality.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

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Contacts

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Alexandre Garcia
Associate Director
+5511-4504-2616
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Alexandre Garcia
Associate Director
+5511-4504-2616
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com