CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded SEACOR Holdings Inc.'s (SEACOR; NYSE: CKH) long-term Issuer Default Rating (IDR) to 'B' from 'B+'. The Rating Outlook is Stable.
The downgrade reflects increases in both consolidated and stand-alone leverage metrics above previous negative sensitivity levels, driven by the $175 million issuance of non-recourse debt at SEACOR Marine Holdings, Inc., a wholly-owned subsidiary. Fitch's base case forecasts that SEACOR's leverage profile will remain above 6.0x, excluding non-recourse SEA-Vista debt, for the next few years.
Fitch assumes that Marine Holdings will be run primarily as a stand-alone entity. Accordingly, Fitch does not assume any recurring distributions up to SEACOR from Marine Holdings, with a subsequent negative effect on stand-alone leverage metrics at SEACOR. Management indicated the potential for a spin-off of Marine Holdings, which, while not a key factor in the downgrade, highlights the potential for a reduction in the amount of, and diversification of, cash flow available for debt service at SEACOR.
Approximately $791 million of senior unsecured debt, excluding the outstanding non-recourse SEA-Vista, debt and Marine Holdings, and other debt, is affected by today's rating action. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The ratings reflect the company's asset quality and favorable fleet renewal strategy, size, and diversity of vessel operations that support offshore drilling and transport commodities domestically, internationally, and along inland river systems, among other waterborne activities. These positives are offset by the continued softening offshore support vessel market environment (which historically contributed roughly 50% of consolidated EBITDA), the influence a persistently weak commodity pricing environment will have on production-linked vessel activity, and continued shareholder friendly initiatives.
SOFTENING OFFSHORE OILFIELD SERVICES MARKET
Offshore rig demand will be softer over the medium term as exploration & production companies continue to focus on living within cashflows and, in some cases, preserving shareholder friendly activities. The reduced offshore activity can be observed in SEACOR's lower average utilization (65% during the first nine months of 2015 versus 79% for the same period in 2015) and day rates ($13,708 versus $15,202), excluding wind farm utility vessels. Fitch believes that higher quality assets will be best positioned to find work during and after the cycle. SEACOR's favorable fleet renewal strategy of continually building, trading, and upgrading vessels to maintain a young, high-grade fleet should position it well. However, Fitch anticipates that offshore rig demand could lag a recovery to supportive oil price levels (estimated at $65-$70/barrel for deepwater) by at least six to 12 months. Fitch currently views the offshore market inflection point to be late 2017/early 2018 with more robust Offshore Marine Services results not likely to happen until after that point.
VESSEL DIVERSIFICATION PROVIDES COUNTERBALANCE
SEACOR has benefited from its vessel diversification, which has helped to offset weaker Offshore Marine Services results. SPIN sentence. The Inland River Services segment has experienced stronger results due to robust crop yields and heightened petroleum movements given pipeline and railway constraints, while the Shipping Services segment has been buoyed by strong demand for U.S.-flagged product tankers. Fitch believes that the company's vessel diversification should continue to be a counterbalance, but weak commodity prices could act as a headwind to production-linked vessel activity. Further, a change in production and consumption dynamics, such as a reduction in crop exports and alleviation of crude transport bottlenecks, could moderate business prospects.
In addition to vessel diversification, the company continues to realize robust corn-based alcohol results that have helped to further offset the decline in Offshore Marine Services results. Fitch does not anticipate this trend to persist and expects lower segment results over the rating horizon.
LEVERAGE PROFILE PRESSURE FORECASTED
Fitch's base case forecasts consolidated debt to increase over the next couple years to fund capital commitments. These commitments are largely comprised of the three Jones Act newbuilds to be funded by the company's non-recourse SEA-Vista affiliate. Fitch expects SEACOR's standalone capital spending, excluding opportunistic acquisitions in the Offshore Marine Services segment to remain manageable over the medium term with funding mainly coming from non-debt sources.
Leverage metrics are anticipated to be pressured by weaker EBITDA and cash flow results with debt/EBITDA metrics, excluding SEA-Vista debt, forecast to be 7.2x and 8.8x in 2016 and 2017, respectively. Importantly, the Fitch base case assumes capital spending is rationalized, asset sales are executed at lower than historical levels, and shares are repurchased at a healthy pace with gross debt levels and unrestricted cash balances remaining relatively unchanged. Fitch's base case projects net debt/EBITDA, excluding non-recourse SEA-Vista debt, to be around 2.5x over the same period.
Fitch's key assumptions within the rating case for SEACOR include:
--Continued weakness in utilization and day rates in the Offshore Marine Services segment until an estimated market inflection point in late 2017/early 2018,
--Flat results in Inland River Services segment;
--Shipping Services segment cash flow growth continues given the delivery of SEA-Vista newbuilds in 2016 and 2017;
--Illinois Corn Processing margins revert to mean levels resulting in more modest cash flow contributions;
--Annual asset sales of $75 million compared to a historical average of around $200 million;
--Capital spending forecast to be generally balanced with cash flow and asset sales. Near-term capital commitments weighted toward SEA-Vista newbuilds to be funded with non-recourse affiliate debt;
--Share buybacks are assumed to moderate to retain adequate liquidity.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Improvements in the offshore oil & gas market that improve utilization and day rates in Offshore Marine Services;
--Continued execution of management's favorable fleet strategy that maintains manageable balance sheet and lease adjusted debt metrics;
--Maintenance of financial flexibility and balanced approach to shareholder initiatives;
--Mid-cycle debt/EBITDA, excluding non-recourse SEA-Vista debt, around 5.0x on a sustained basis.
Fitch believes positive rating actions are unlikely over the near term given the expected market headwinds for offshore support vessels and forecasted leverage profile.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Prolonged commodity market downcycle that materially weakens the utilization and day rate outlook;
--Robust asset-level financing structures that lead to a dilution of asset quality and heighten cash flow risks;
--Heightened level of share repurchases and/or commencement of dividend payments inconsistent with the expected cash flow profile;
--Mid-cycle debt/EBITDA, excluding non-recourse SEA-Vista debt, above 7.5x on a sustained basis.
Rating actions will be closely linked to management's ability to manage its leverage profile and maintain financial flexibility in a softening offshore support vessel market environment.
ADEQUATE NEAR-TERM LIQUIDITY POSITION
As of Sept. 30, 2015, SEACOR had cash and equivalents, restricted cash, marketable securities, and construction and Title XI reserve funds of $741.9 million, $253.5 million of which is comprised of restricted construction and Title XI reserve funds. The company terminated its revolving credit facility in August 2013. Fitch does not view the lack of a credit facility as a near-term liquidity concern given the heightened levels of cash and equivalents. Fitch expects, however, that the company will manage operations and maintain a balanced financial polity that preserves substantial cash reserves ensuring adequate liquidity.
MANAGEABLE NEAR-TERM MATURITIES PROFILE
The company has modest scheduled annual maturities through 2018 that represent principal repayments on asset-specific mortgages, among other indebtedness. The most significant scheduled maturity over the next five years is the remaining $211 million in 7.375% senior notes due 2019. Additionally, the first put dates for the $350 million and $230 million convertible notes are in December 2017 and November 2020, respectively. The conversion option is currently out-of-the-money for both convertible notes.
SEACOR is not subject to material financial covenants. Other customary covenants consist of lien limitations and transaction restrictions.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
SEACOR Holdings, Inc.
--Long-term IDR to 'B' from 'B+';
--Senior unsecured notes recovery rating to 'B+/RR3' from 'BB-/RR3'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 12 Jun 2015)
Dodd-Frank Rating Information Disclosure Form