CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the senior secured series 2012-1 notes issued by Schahin II Finance Company (SPV) Limited to 'D' from 'CC' following the recent missed payment of scheduled interest due in September 2015. The Recovery Estimate (RE) is revised to 'RE50' from 'RE65'. The outstanding balance of the notes is approximately $651.5 million.
The notes currently benefit from a naval mortgage on the vessel Sertao, a dynamically positioned drilling unit that until April 2015 was operating on the offshore waters of Brazil. Initially, the notes were also backed by flows related to a long-term charter and services agreement signed with Petroleo Brasileiro S.A (Petrobras: 'BBB-'; Outlook Negative) for the use of this drillship. Schahin Petroleo e Gas was the original operator of the drilling rig, a new rig manager has been recently appointed to act on behalf of the majority controlling party.
KEY RATING DRIVERS
Missed Scheduled Interest Payment: Fitch's rating action on the notes follows the recent missed payment of scheduled interest due in September 2015. On Sept. 26, 2015 Fitch received notification from the indenture trustee indicating that the majority controlling party had advised not to make any payments on the September payment date on an attempt to preserve the value of the collateral.
Outstanding Reserves: As of August 2015, the balance of the reserve accounts was approximately $61.6 million with the $42 million related to the debt service reserve account (DSRA) of which $40 million are in the form of a letter of credit (LC). Cash in the reserve accounts was used in September to make the following payments: (i) insurance fees, (ii) Sertao's operating expenses, (iii) restructuring agent fees, and (iv) transaction fees. The majority controlling party also instructed the indenture to draw for the remaining amounts on the DSRA LCs.
Operator Replacement: On April 17, 2015 certain entities within the Schahin group filed for recuperacao judicial resulting in a technical event of default of the notes, this resulted in an operator replacement event. In September 2015, the indenture trustee exercised its rights and acting at the direction of the majority controlling party, terminated Schahin Petroleo e Gas as Sertao's operator. A new rig manager, V. Ships, has been appointed by the majority controlling party to assist in the management of the vessel during the asset disposition process.
RECOVERY ESTIMATES
Fitch has revised the notes' RE to 'RE50' from 'RE65', reflecting an estimate of the potential cash flows generated by the liquidation of the assets under market conditions.
Fitch assigns REs to all classes rated 'CCC' or below. REs are forward-looking, taking into account Fitch's expectations for principal repayments on a distressed structured finance security. REs do not reflect the actual recovery noteholders may get upon sale of the underlying vessels or potential restructuring of the notes.
Offshore drillers have been facing softening market conditions due to decreased demand and a significant backlog of newbuilds. The more than 50% drop in oil prices has compounded the effects of the oversupply cycle, resulting in a decline in market dayrates of roughly 50% from pre-cycle levels and heightened pressure on utilization rates. Fitch continues to believe that medium-term demand will rebound and absorb newer high-quality assets that operate more efficiently.
According to Fitch's estimates and considering potential legal fees, mobilization fees and additional exportation costs, the agency has revised the notes' REs to 'RE50'.
RATING SENSITIVITIES
The 'D' rating will be withdrawn within 11 months of today's date.
DUE DILIGENCE USAGE
No third-party due diligence was provided or reviewed in relation to this rating action.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Criteria for Rating Oil Vessel-Backed Financing in Latin America (pub. 18 Dec 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=834309
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
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