Fitch Downgrades Odebrecht-Sponsored Drilling Rig Transactions

CHICAGO--()--Fitch Ratings has downgraded the following oil vessel-backed financings sponsored by Odebrecht:

Odebrecht Offshore Drilling Finance Ltd. (OODFL)

--Series 2013-1 senior secured notes due 2023 to 'BB+' from 'BBB-';

--Series 2014-1 senior secured notes due 2023 to 'BB+' from 'BBB-'.

Odebrecht Drilling Norbe VIII/IX Ltd.

--Series 2010-1 senior secured notes due 2022 to 'BB+' from 'BBB-'.

The ratings remain on Rating Watch Negative.

The Odebrecht Drilling Norbe VIII/IX Ltd notes are backed by the flows related to the charter and services agreements signed with Petroleo Brasileiro S.A. (Petrobras) for the use of the dynamically positioned ultra-deepwater (UDW) drillships Norbe VIII and Norbe IX. The OODFL notes are backed by the flows related to the charter and services agreements signed with Petrobras for the use of the dynamically positioned UDW drillships ODN I and ODN II and the UDW semi-submersibles Norbe VI and ODN Tay IV. Odebrecht Oleo e Gas S.A. (OOG, oil and gas arm of Brazilian-based Odebrecht Group) is the operator of the drilling rigs and primary sponsor of the transactions. OOG is the largest Brazilian operator of UDW rigs chartered to Petrobras, with seven operating UDW rigs in its fleet.

The rating actions reflect: (i) Fitch's view related to Petrobras' willingness to honor the underlying offshore charter and service agreements in the event of a performance-related breach; (ii) the continued pressure on global day rates and asset values caused by stressed oil prices; and (iii) weak albeit improving performance of certain assets backing OODFL. The ratings are ultimately supported by the underlying contracts, the growing importance of OOG as an oil service provider and its commitment to improving the performance of the vessels backing the transactions. Furthermore, the majority of the vessels backing these transactions are state of the art assets contracted at competitive day rates to provide essential services needed for Petrobras. The Negative Watch reflects the Negative Watch in place for Petrobras' ratings and uncertainties related to the ongoing Lava Jato investigations.

KEY RATING DRIVERS

Petrobras' Willingness and Ability to Honor Existing Agreements: Petrobras' rating ('BBB-'; Rating Watch Negative) acts as 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 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 vessels perceived as less attractive. Although the underlying assets backing the SF transactions have shown an improving performance over the past several months, any considerable downtime in the future might increase the risk of contract termination.

Credit Quality of the Sponsor: While Fitch does not believe the temporary ban related to the Lava Jato investigations will impact the existing Petrobras/OOG contracts, the ongoing investigations could negatively impact the credit quality of the sponsor group and/ or OOG and, as a result, the SF transactions, which are directly and indirectly exposed to the credit quality of OOG and the overall Odebrecht group. The charter and service agreements have termination clauses that include bankruptcy of the sponsor and performance-related deficiencies, such as extended down time.

Underlying Charter Agreements: Petrobras has indicated its intention to continue honoring the terms of existing offshore charter and service contracts. In Fitch's view, the existing contracts supporting the transactions remain in line with market prices and the drilling rigs continue to remain essential to Petrobras' offshore production plans. While global supply may increase during 2015 and 2016, local supply of UDW drillships will continue to be constrained by the delayed delivery of the 28 new drillships of Sete Brazil. Existing local content requirements further protect these transactions as typically international players do not comply with such restrictive requirements. Any changes to local content requirements must be approved by federal government.

Exposure to Market Day Rates and Asset Prices: Fitch's base case analysis for the oil vessel-backed SF transactions assumes that the existing underlying contracts remain in place for the duration of the contracts. However, if the temporary ban is further extended or a contract terminates for any other reason including performance issues, the related transactions could be exposed to then current market conditions. Fitch believes contracted day rates remain in line with current market rates; however, a further long-term decline in oil price may decrease market day rates below contracted day rates.

Heightened Re-chartering Risk: OODFL is exposed to some element of re-chartering risk as two of the four assets backing the transaction are scheduled to expire in 2019 (Norbe VI) and 2020 (ODN Tay IV), prior to the scheduled maturity of the program. While Fitch does not believe the current ban will ultimately impact the ability to re-charter in four years, it remains uncertain what impact this may have on OOG's future contracting with Petrobras. Furthermore, a continued decline in oil prices will negatively impact the day rates under which Norbe VI and ODN Tay IV will ultimately be able to contract. This risk remains mitigated by the relatively moderate loan to values (LTVs) expected when the contracts for Norbe VI and ODN Tay IV are scheduled to expire.

Improving Operating Performance: Although certain assets within the Odebrecht portfolio have experienced prolonged downtimes, performance has improved during the last six months. OOG has committed to work closely with Petrobras and has implemented a recovery program for Tay IV to guarantee improved vessel performance. Fitch expects that with these measures, performance for all the assets backing these transactions will be closer to 95%, which is in line with Fitch's long-term uptime expectations. Sustained performance levels below expectations may trigger further rating actions.

RATING SENSITIVITIES

The ratings are sensitive to changes in the credit quality of Petrobras as offtaker and its willingness to honor existing contracts, results of the ongoing investigations on OOG and the Brazilian oil and gas industry, the credit quality of Odebrecht, and the operating performance of the underlying assets.

ASSET PERFORMANCE UPDATE

Certain vessels have experienced volatile uptimes and extended operational learning curves during the ramp-up period. Specifically, ODN Tay IV's average quarterly operational uptime was recorded at 48.3% during 2Q 2014 as a result of difficulties with the blowout preventer. Ensuing preventative maintenance caused more downtime, dropping the average operational uptime to 15% for the following quarterly period. OOG and Petrobras have been working closely to improve operational efficiencies within the OOG fleet of vessels. Uptime performance improved notably during the last quarter recorded.

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);

--'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).

--'Petroleo Brasileiro S.A. (Petrobras) (Political Labyrinth)' (Feb. 213 2015)

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981223

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Contacts

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

Contacts

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