Fitch Affirms Teekay Shuttle Tanker Finance Series B Sr. Secured Notes at 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings affirms Teekay Shuttle Tanker Finance LLC's senior secured notes as follows:

--$174.15 million series B senior secured notes at 'BBB-'; Outlook Stable.

The notes are backed by the flows related to two charter agreements signed with Brazil Shipping I Limited, a wholly-owned subsidiary of BG Energy Holdings Ltd. The charter agreements give BG the use of two shuttle tankers, the Bossa Nova Spirit and the Sertanejo Spirit, for a period of 10 years. The sponsor and operator of the transaction is Teekay Offshore Partners L.P. (TOO), the largest and most experienced owner and operator of shuttle tankers.

Fitch's rating addresses the timely payment of interest and principal on a semi-annual basis with the possibility of the deferral of up to one semi-annual principal payment without declaration of a default event. In addition, the transaction structure includes a six-month tail between the expected maturity (December 2023) and legal final maturity (June 2024) to dispose of the vessel and redeem the outstanding principal and interest amounts on the notes, if necessary.

KEY RATING DRIVERS

Strategic Nature of the Assets:

The demand for shuttle tankers has remained stable during the current oil price scenario, as the marginal cost related to production of oil is low, compared with the high levels of capital expenditure invested in the development of ultra-deep-water fields. For BG, which has six FPSOs operating in Brazil, shuttle tankers represent an integral part of the oil production chain, providing efficient transportation of oil produced in ultra-deep-water oil fields, where pipeline infrastructure is difficult and expensive to develop

Off-taker's Credit Quality:

The rating assigned to this transaction is capped at the foreign currency issuer default rating (FC IDR) of BG as off-taker to the transaction. Fitch placed all of BG Energy Holdings Ltd's (BG) ratings on Rating Watch Positive in April 2015 following the announcement that the boards of BG and Royal Dutch Shell plc ('AA'/Negative Watch) had agreed to recommend a merger of the two companies. Fitch aims to resolve the Rating Watch upon the successful completion of any potential transaction in 1H'16 and once there is greater clarity with regard to Shell's post-acquisition strategy. Should Fitch downgrade BG's foreign currency Issuer Default Rating (IDR) below 'BBB-', the rating assigned to the senior notes will also be downgraded accordingly.

Quality of the Operator/Sponsor:

Given the perceived ease-of-replacement of the operator if required and the strategic nature of the assets to BG's E&P plans in Brazil the transaction's rating is not linked to the operator's credit quality. Additionally, TOO's experience as the largest owner of shuttle tankers worldwide and the performance of its fleet support the asset's strong operational performance.

Residual and Refinance Risk:

Exposure to residual and refinancing risk limits the rating as the transaction contemplates a gross balloon payment at maturity of US$50 million. To partially mitigate this exposure, the transaction incorporates a dividend retention mechanism to reduce this amount. This mechanism ($15 million) plus the funds in OPEX reserve ($3.5 million) allows the balloon to be reduced from $50 million to approximately $31.5 million assuming a 98% uptime.

Strong Operational Performances:

During its first year and a half of operations Bossa Nova Spirit operated at 93% uptime, which is consistent with the expected ramp-up period uptime for these vessels. Sertanejo Spirits operated at 100%, exceeding Fitch's expectations for long term performance. Daily operating expenses (OPEX) averaged $12,000, below projected expenses during this time frame.

Adequate Leverage and Liquidity:

On a net debt basis, Fitch's adjusted valuation of the vessels indicated an initial net loan to value (LTV) of 68.2%, which has started to decrease as the transaction has started to de-lever. The semi-annual debt service coverage ratio (DSCR), which considers collections and total expenses, has averaged 1.32x during the life of the transaction (above the expected 1.28x DSCR). In addition, the transaction benefits from liquidity reserves covering one semi-annual principal and interest payment and three months of OPEX.

Rating Not Limited by Brazil's Country Ratings:

While these assets operate in Brazilian oilfields, the transaction is not directly constrained by Brazil's country ratings as cash flows are collected off shore and related parties are not Brazilian. However, a considerable downgrade of Brazil may have a negative impact on the transaction. Brazil's current local and foreign currency IDRs are 'BBB-', and its Country Ceiling is 'BBB'.

RATING SENSITIVITIES

This transaction's rating may be sensitive to movements in the credit quality of the off-taker of the vessels. The rating assigned to this transaction is capped at the foreign currency Issuer Default Rating (FC IDR) of BG as off-taker to the transaction. Should Fitch downgrade BG's FC IDR below 'BBB-', the rating assigned to the senior notes will be downgraded accordingly.

In addition, the rating on the notes is sensitive to the vessels' operating performance. BG will pay a daily rate for the use of the vessels, as long as they are available for use. The off-taker will not make payment if the vessel is unavailable (off-hire) due to nonscheduled dry docking, emergency repair or other reasons.

Although the transaction rating is not directly limited by Brazil's credit quality, in case of considerable downgrade, the rating of the transaction may be negatively affected.

DUE DILIGENCE USAGE

No third-party due diligence was provided to or reviewed by Fitch in relation to this rating action.

Additional information is available at www.fitchratings.com.

Sources of Information:

In addition to the sources of information identified in the master criteria, this action was additionally informed by the sponsor of the transaction.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993444

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993444

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst:
Andres de la Cuesta, +1-312-606-2330
Associate Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Committee Chairperson:
Greg Kabance, +1-312-368-2052
Managing Director
or
Media Relations:
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Andres de la Cuesta, +1-312-606-2330
Associate Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Committee Chairperson:
Greg Kabance, +1-312-368-2052
Managing Director
or
Media Relations:
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com