Fitch Downgrades QGOG Atlantic/Alaskan Ltd Sr. Secured Notes to 'B+'; Outlook Negative

CHICAGO--()--Fitch Ratings has downgraded the senior secured notes issued by QGOG Atlantic/Alaskan Rigs Ltd. (the notes) as follows:

--Series 2011-1 senior secured notes due 2019 to 'B+' from 'BB-';

The Rating Outlook is 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 follows Fitch's downgrade of QGOG Constellation, the sponsor of the transaction, and operator of the rig. The Rating Outlook on the notes reflects QGOG Constellation's Issuer Default Ratings (IDRs) Negative Rating Outlook.

KEY RATING DRIVERS

Downgrade of QGOG Constellation:

On June 3, 2016, Fitch downgraded the IDRs for QGOG Constellation to 'B+'/Outlook Negative from 'BB-'/Outlook Negative. The transaction is directly and indirectly exposed to the credit quality of QGOG Constellation as the charter and service agreements have termination clauses relating to bankruptcy and performance, and therefore linked to the credit quality of this entity. QGOG's rating is currently the implied rating cap for the transaction.

The downgrade reflects Fitch's increasing expectations on Petrobras' renegotiating its backlog, which could affect QGOG's future cash flow generation and slow down its deleveraging process. This risk is heightened by the short to medium-term need to renew some of QGOG's contracts as they expire. Petrobras' efforts to reduce capex and expenses by downsizing its drilling rig fleet in line with the current deterioration of the oil market.

Strength of the Contract:

Petrobras has demonstrated a willingness to terminate existing charter agreements related to less strategic assets when a termination clause is breached. Although the Atlantic Star and Alaskan Star have historically performed well and are two of the few remaining mid-water vessels contracted by Petrobras, these second-generation mid-water vessels are older and less strategic than ultra-deepwater (UDW) rigs and equipment related to production, and therefore may be more vulnerable to contract renegotiation or termination.

Under current market conditions and market day-rates for newer UDW assets close to the contracted day-rates for the Alaskan Star and Atlantic Star, Petrobras may approach the operator in an attempt to restructure certain contracts to reduce expenses over the medium term. Continued pressure on global day-rates and asset value caused by stressed oil prices imply a low likelihood that the Atlantic Star and Alaskan Star would be re-contracted in today's environment outside of Brazil and underline the importance of a strong operating performance to avoid any performance-related contract termination.

Performance of the Assets:

Performance of Atlantic Star and Alaskan Star are in line with expectations, and in line with last review's performance (December 2015). Although both assets have performed well and QGOG is one of the best operators in Petrobras' fleet, Fitch believes that given the nature of the assets and the contracted day-rates, these charter and services agreements are exposed to early termination in the event of poor performance.

Available Liquidity:

The transaction benefits from a Debt Service Reserve Account equivalent to $64.3 million, in the form of Letters of Credit provided by Citibank N.A rated 'A+'/Outlook Stable and Wells Fargo rated 'AA-'/Outlook Stable. As of March 2016, net debt balance closed at approximately $137.5 million.

RATING SENSITIVITIES

The ratings are sensitive to changes in the credit quality of Petrobras as offtaker, changes in the credit quality of QGOG Constellation, and the operating performance of the underlying assets. Additionally, the ratings are sensitive to changes in Brazilian oil and gas industry dynamics and overall market dynamics for midwater assets, and Fitch's perception of the strength of the payment obligation.

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 information from Queiroz Galvao Oleo e Gas.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Criteria for Rating Oil Vessel-Backed Financings in Latin America (pub. 30 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875783

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=1005599

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005599

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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 Street
Chicago, IL 60602
or
Committee Chairperson
Greg Kabance, +1-312-368-2052
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andres de la Cuesta, +1-312-606-2330
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Committee Chairperson
Greg Kabance, +1-312-368-2052
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com