Fitch Downgrades QGOG Atlantic/Alaskan Rigs Ltd.'s Senior Secured Notes; Maintains Negative Watch

CHICAGO--()--Fitch Ratings has downgraded the following QGOG Atlantic/Alaskan notes:

--Series 2011-1 senior secured notes due 2019 downgraded to 'BB+' from 'BBB-' ($371.6 million outstanding).

The rating remains on Rating Watch Negative.

The notes are backed by the flows related to the charter agreements signed with Petroleo Brasileiro (Petrobras) for the use of the moored semi-submersibles Atlantic Star and Alaskan Star. Queiroz Galvao Oleo e Gas S.A. (QGOG) is the operator of the vessels and QGOG Constellation S.A. (QGOG Constellation) is the primary sponsor of the transaction.

The rating action reflects Fitch's view related to Petrobras' willingness to honor the underlying offshore charter and service agreements in the event of a performance-related breach, and the continued pressure on global day rates and asset values caused by stressed oil prices. While the Atlantic Star and Alaskan Star have strong historical performance, these mid-water assets are considered less strategic than the ultra-deep water assets within Petrobras's overall fleet and therefore may be more vulnerable to contract termination. The ratings are ultimately supported by the credit quality of Petrobras, the underlying long-term contracts, QGOG's position as one of Petrobras' top performing service providers and the credit quality of QGOG Constellation. The the Negative Watch reflects the Negative Watch in place for Petrobras' ratings.

KEY RATING DRIVERS

Petrobras' Willingness and Ability to Honor Existing Agreements: Petrobras' rating ('BBB-'; Negative Watch) acts as an ultimate cap to the structured finance (SF) transaction ratings. Fitch believes continued financial pressure on Petrobras may impact the company's ability to meet its projected capital expenditures (capex) and therefore its willingness to honor all existing charter agreements. While the exploration and production (E&P) contracts remain a strategic capex investment and the bulk of Petrobras' contracted fleet relates to production, Petrobras may decide to keep the most strategic and best operating assets within the chartered fleet while reducing costs on those perceived as less attractive. Although the underlying assets backing the SF transaction have relatively strong historical performance, any considerable downtime in the future might increase the risk of contract termination.

Strategic Nature of the Assets: While Petrobras has indicated its intention to continue honoring the terms of its existing offshore charter and service contracts, the company may choose to differentiate these payments in the future. In Fitch's view, this specific equipment is not considered as strategic to Petrobras production plans as UDW rigs. Although the Atlantic Star and Alaskan Star have strong historical performance, their charter agreements could be more vulnerable if future performance changes.

Credit Quality of QGOG Constellation: On Jan. 12, 2015, Fitch placed QGOG Constellation S.A.'s (holding company) 'BB-' IDRs on Negative Watch to reflect Petrobras' decision to temporarily ban all companies associated with the Queiroz Galvao business group from entering into contracts and participating in new bidding processes with Petrobras. While Fitch does not believe the temporary ban will impact the existing contracts for the Atlantic Star and Alaskan Star, the SF transaction is directly and indirectly exposed to the credit quality of QGOG as the charter and service agreements have termination clauses that include bankruptcy and performance issues.

Strong Performance, Low Leverage Mitigate Pressured Asset Values: During 2013 and 2014, performance of the Atlantic Star and Alaskan Star was excellent, with both vessels recording average uptime levels near 99%. Despite strong uptime performance, mid-water semi-submersibles have seen recent pressure on global utilization, day rates, and, as a result, asset values. A sustained drop in oil process could exacerbate this issue; however, this exposure is significantly mitigated since the transaction continues to de-lever and net loan-to-values have decreased, providing sufficient protection to investors.

RATING SENSITIVITIES

The ratings are sensitive to changes in the credit quality of Petrobras (as offtaker to the transaction) and its willingness to honor existing contracts, results of the ongoing Lava Jato investigations on the Queiroz Galvao business group and the Brazilian oil and gas industry, the credit quality of QGOG Constellation, and the operating performance of the rigs.

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' (Dec. 18, 2014);

--'Fitch Downgrades Petrobras' IDRs to BBB-, Places Ratings on Watch Negative' (Feb. 3, 2015);

--'What Investors Want to Know: Lava Jato Implications' (Jan. 29, 2015).

Additional Disclosure

Solicitation Status

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Contacts

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

Contacts

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