NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the ratings for Weatherford International plc (Weatherford; NYSE: WFT) and its subsidiaries, including the companies' Long-Term Issuer Default Ratings (IDRs) to 'CCC' from 'B+'. A full list of rating actions follows at the end of this release.
Weatherford International Ltd. (Weatherford Bermuda), a wholly owned subsidiary of Weatherford International plc. (Weatherford, NYSE: WFT) expects to issue $500 million senior unsecured notes due 2024, under Rule 144A. Fitch does not expect the issue to be upsized. The notes will be fully and unconditionally guaranteed by Weatherford and Weatherford International, LLC. (Weatherford Delaware) making the notes pari passu with existing senior unsecured debt such as the 7.75% senior unsecured notes due 2021 and the 8.25% senior unsecured notes due 2023. The company expects to use the proceeds to pay down borrowings under the revolving credit facility. Fitch expects to rate the new unsecured notes 'CCC-(EXP)/RR5'.
The downgrade reflects the potential further tightening of the company's specified leverage and L/C ratio covenant following the fourth quarter (4Q) 2016 calculation, and with the expected 0.5x step-down in 1Q 2017 per the Credit Agreement. Fitch believes that while the bond deal provides some near-term cushion, use of proceeds to repay revolver borrowings may also signal more limited through the cycle accommodation on the part of the bank group.
The rating also considers the weaker than expected metrics, worsening outlook for free cash flow (FCF) generation, and more challenged than previously expected industry trends. A $140 million SEC penalty payment will be spread out through the next four quarters, which places additional stress on an already weak financial profile. Fitch expects that these payments will be funded with drawings under the revolving credit facility. Finally, the recent consolidation in the oilfield services sector is likely to weaken WFT's competitive position in an evolving industry that may favor larger players.
Fitch also considers the potential that persistently low oil & gas prices could extend the oilfield services down cycle beyond our current expectations and further heighten Weatherford's liquidity risk. Fitch currently forecasts that FCF will be negative for the next few quarters, driven by weaker EBITDA expectations. Asset sales are not factored in our forecasts.
Approximately $7 billion of debt, excluding short-term borrowings, is affected by today's rating action.
KEY RATING DRIVERS
Weatherford's ratings consider its position as the fourth largest international oil & gas services company, geographic diversification (North America has historically contributed 45% to 50% of consolidated revenues), returns-focused strategic initiatives, and projected FCF profile leading to limited FCF driven debt reduction over the rating horizon. These considerations are offset by the company's mixed asset quality, covenant pressures and weaker than forecast through-the-cycle leverage and FCF metrics.
NEGATIVE 2016 FCF, ELEVATED METRICS FORECAST
Fitch's rating case projects that Weatherford will burn approximately $200 million FCF in 2016. This FCF estimate considers a Zubair settlement, full year of operating cost savings, maintenance capex levels, weaker working capital expectations, and further reductions in oilfield services demand. Debt/EBITDA metrics are currently forecast to increase further in 2016 to 22.8x at the end of 2016, reflecting much weaker than initially expected EBITDA in the third and fourth quarters of 2016 and in the forecast period. Absent a material turn around in demand expectations, Fitch believes there is limited room for Weatherford to remain in compliance with the specified debt/EBITDA covenant due to the step downs in 1Q 2017 and Fitch's forecasted year over year decline in 4Q 2016 adjusted EBITDA.
Fitch's key assumptions within the rating case for Weatherford include:
--WTI oil price that trends up from $42/barrel in 2016 to a long-term price of $65/barrel;
--Henry Hub gas that trends up from $2.35/mcf in 2016 to a long-term price of $3.25/mcf;
--Consolidated revenue decline of over 40% in 2016 with greater declines in North America relative to international regions on average due to further global E&P capital spending reductions with a moderate recovery thereafter;
--Margins that exhibit a full year of cost improvements in 2016 with some moderate additional cost reductions assumed thereafter;
--Capital expenditures of $200 million in 2016 followed by similarly low levels of capex until operating cash flows exhibit meaningful growth;
--Retention of international rig fleet;
--$140 million in SEC penalty payments over the next four quarters starting in 4Q 2016.
Positive: No positive rating actions are currently contemplated over the near term given the continued weakness in the oilfield services outlook and Fitch's projections for leverage that exceeds through-the-cycle levels. However, future developments that may, individually or collectively, lead to a positive rating action include:
For an upgrade to 'B-':
--Demonstrated commitment by management to lower gross debt levels;
--Track record by management of achieving operational and financial targets;
--Demonstrated ability to effectively manage forecasted cash burn and covenant violation risks;
--Improved oilfield services outlook supported by pricing and/or activity level improvements such as additional contracts from credit worthy customers;
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Failure to manage covenant issues, and FCF burn that further heighten liquidity risks;
--Further material, sustained declines in oilfield services demand.
CAPITAL MARKET TRANSACTIONS ALLEVIATE NEAR-TERM LIQUIDITY CONCERNS
Weatherford had cash and equivalents of $440 million, as of Sept. 30, 2016. The majority of cash has historically been held by foreign subsidiaries with $122 million denominated in exchange-restricted Angolan kwanza. Supplemental liquidity is principally provided by the company's recently amended $1.15 billion unsecured guaranteed credit facility due July 2019, which is subject to periodic reductions to a minimum commitment of $1 billion. Fitch notes, however, that the company will have access to an additional $229 million in non-extending bank credit facility commitments until July 2017. There is an accordion feature, which allows for existing lenders to commit to an additional $250 million.
Weatherford has pro-actively refinanced its up-coming maturities through a series of capital market transactions in the last few months. As such, the company has a very manageable maturity schedule. Over the next five years, Weatherford has $89 million in 6.35% senior notes due June 2017, $66 million in 6% senior notes due in March 2018, $490 million in 9.625% senior notes due March 2019, and $363 million in 5.125% senior notes due September 2020. The recently issued $500 million secured term loan is due July 2020, is subject to quarterly amortization payments of $12.5 million that began on Sept. 30, 2016. Following the pay down of approximately half of the 9.625% senior notes due March 2019, the amended credit facility is no longer subject to the initial Nov. 28, 2018 springing maturity date. Management has indicated that they expect to meet the upcoming maturities with a combination of cash on hand, and still pending land rig sale proceeds (management estimate of $500 million to $1 billion), and debt proceeds.
The company's main financial covenants, as defined in the term loan and credit agreement, are a maximum specified senior debt-to-EBITDA ratio of 3x and, maximum specified senior debt and letter of credit-to-EBITDA ratio of 4x, and minimum asset coverage ratio of 4x. Specified senior debt, as per the covenants, represents the secured term loan and unsecured debt enhanced by a guarantee. As of Sept. 30, 2016, Weatherford was in compliance with all the covenants under the Credit Agreement. The specified senior debt-to-EBITDA calculation was 1.94x, Specified Asset Coverage was 12.7x and the Specified Leverage and L/C ratio was 3.18x. However, given the weakened outlook for EBITDA and cash flow, Weatherford may face tightened covenant headroom when the covenants step down in 1Q 2017, with the specified senior debt-to-EBITDA covenant and the specified senior debt and letter of credit to EBITDA ratio each decline by half a turn. Other customary covenants contained in the indentures governing the senior unsecured notes restrict the ability to incur additional liens, engage in sale and leaseback transactions, and merge, consolidate, or sell assets, as well as change in control provisions.
SECURITY AND GUARANTEES
The term loan security package is a first lien on Weatherford International Ltd. (Weatherford Bermuda) with guarantees from the parent and Weatherford International, LLC (Weatherford Delaware), as well as guarantees from WOFS International Finance GmbH (Swiss) and Weatherford Worldwide Holdings GmbH, among others. The amended unsecured guaranteed credit facility is guaranteed by substantially all material HoldCos and all material OpCos in certain jurisdictions that directly or indirectly represent approximately 100% of EBITDA. Guarantees have also been provided by and between Weatherford Bermuda and Weatherford Delaware for all senior unsecured notes, including the proposed $500 million new offering, effectively making the notes pari passu and establishing cross-guarantees. Additionally, Weatherford International plc has guaranteed all obligations of its affiliates.
Fitch believes that the term loan's first-lien security gives it priority over the unsecured guaranteed credit facility and senior unsecured notes. Further, Fitch views the guarantees provided by the material HoldCos and OpCos structurally subordinate the senior unsecured notes.
OTHER CONTINGENT LIABILITIES
Weatherford's pension obligations were underfunded by $124 million for the year ended 2015. Fitch believes that pension funding requirements are manageable relative to mid-cycle funds from operations and pension contributions. The company had nearly $1.6 billion in other contingent obligations on a multi-year, undiscounted basis as of Dec. 31, 2015. These obligations consisted of non-cancellable operating lease payments ($1.2 billion) and purchase obligations ($383 million).
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
Weatherford International plc.
--Long-Term IDR to 'CCC' from 'B+'.
Weatherford International Ltd. (Bermuda)
--Long-Term IDR to 'CCC' from 'B+';
--Senior secured term loan A to 'B/RR1' from 'BB+/RR1';
--Senior unsecured guaranteed bank facility to 'B-/RR2' from 'BB/RR2';
--Senior unsecured notes to 'CCC-/RR5' from 'B+/RR4';
--Short-Term IDR to 'C' from 'B';
--Commercial paper program to 'C' from 'B'.
Weatherford International, LLC. (Delaware)
--Long-Term IDR to 'CCC' from 'B+';
--Senior unsecured notes to 'CCC-/RR5' from 'B+/RR4.'
Fitch has also assigned the following expected rating:
Weatherford International Ltd. (Bermuda)
--Senior unsecured notes 'CCC-(EXP)/RR5'.
Additional information is available at 'www.fitchratings.com'.
Summary of Financial Statement Adjustments
Fitch has made no material adjustments that are not disclosed within the company's public filings.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
Dodd-Frank Rating Information Disclosure Form
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