Fitch Downgrades Offshore Drilling Holding S.A. to 'CCC'

CHICAGO--()--Fitch Ratings has downgraded the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) for Offshore Drilling Holding SA (ODH) to 'CCC' from 'B-'. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

ODH's rating downgrade reflects the expected weakening of the company's credit profile as a result of the temporary suspension of Bicentenario operations. This increases ODH's re-contracting risk in general and specifically for this unit upon expiration on its currently suspended contract in June 2017. Additionally, Fitch does not expect ODH to generate enough cash flow from operations (CFFO) to cover interest expenses while Bicentenario is suspended and not receiving payments, which was further exacerbated by the recent contract renegotiations for Centenario and La Muralla IV resulting in lower day-rates.

Fitch believes that while the company's liquidity position provides some near-term cushion, the high uncertainty surrounding the ability to secure a long-term contract for Bicentenario increases ODH's credit risk. The company has enough liquidity to cover at least the next interest payment in March 2017 and potentially the second annual instalment due September 2017 as well as operating expenses for the drilling units over the next six to 12 months.

The notes also benefit from a one year debt service reserve account. As of June 30, 2016, consolidated cash on hand amounted to USD90 million of which USD41 million were related to the Guarantors. Additionally, the notes benefit from a one year debt service reserve account totaling approximately USD80 million.

While ODH benefits from a competitive position in the Mexican market and good relationship with its offtaker Petroleos Mexicanos (PEMEX), the recent consolidation in the global oilfield services sector is likely to weaken the company's competitive position in an evolving industry that may favor larger players.

DETERIORATED FINANCIAL METRICS

Fitch does not expect ODH to generate enough CFFO to cover interest expenses while Bicentenario is suspended and not receiving payments, this situation has been further exacerbated by the recent contract renegotiations for Centenario and La Muralla IV resulting in lower day-rates. Fitch expects debt/EBITDA metrics to peak in 2017 exceeding 14.0x and to remain above 10.0x for the next three years, reflecting much weaker than initially expected EBITDA as a result of lower day rates and potential uncertainties related to Bicentenario resuming operations after 2017. Absent a material turn around in demand expectations, Fitch believes there is limited room for ODH to maintain a sustainable capital structure and business model.

ROLL-OVER AND DAY-RATES RISK

Throughout the oil and gas industry, companies are facing pressure to renegotiate day rates. This has already impacted ODH as day-rates for Centenario and La Muralla IV were both decreased to USD308,000 from USD365,000 and USD489,000, respectively, in exchange for an extension on the contracts. A larger concern remains the situation of the platform Bicentenario, which is currently not operating and which contract renewal remains uncertain, given Pemex's decision to significantly cut its investments in deep-water exploration.

OIL PRICE PRESSURES

Offshore drillers continue to face depressed market conditions due to lower demand and a significant oversupply of rigs. The severe decline in oil prices has compounded the effects of the offshore rig oversupply cycle resulting in continued global market day-rate deterioration. ODH's ratings also reflect the potential that persistently low oil & gas prices could extend the oilfield services down cycle beyond our current expectations potentially increasing ODH's liquidity risk.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating cases for ODH include:

--Brent and West Texas Intermediate (WTI) oil prices trend toward a longer-term price of USD65/barrel;

--After expiration of the contracts for its drilling rigs, ODH may face difficulties re-contracting its assets;

--No revenues received for the operations of Bicentenario during 2017;

--Revised day-rates to USD308,000 for Centenario and La Muralla IV for the rating period;

--No dividend payments forecasted.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

--Failure to re-contract rigs following contract expiration;

--Deteriorating liquidity as a result of negative free cash flow (FCF) during Bicentenario contract suspension;

--Further material, sustained declines in oilfield services demand.

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.

LIQUIDITY

ODH had cash and equivalents of $90 million, as of June 30, 2016. Approximately USD40 million of ODH's cash position is related to the Guarantors while the remaining is related to the non-guarantors. Supplemental liquidity is principally provided by the company's debt service reserve accounts, which as of June 2016 was USD110.4 million, USD79.9 million related to the debt service reserve account of the 2020 senior secured notes and USD30.5 million of La Muralla IV project finance.

FULL LIST OF RATING ACTIONS

Fitch has downgraded ODH's ratings as follows:

--Long-Term Foreign and Local Currency IDRs to 'CCC' from 'B-'

--Senior secured notes to 'CCC'/'RR4' from 'B-'/'RR4'.

The Negative Rating Outlook has been removed.

Date of Relevant Rating Committee: Nov. 28, 2016

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016)

https://www.fitchratings.com/site/re/890199

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015449

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015449

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Alberto de los Santos
Associate Director
+52 (81) 8399-9100
or
Committee Chairperson
Alberto Moreno
Senior Director
+52 (81) 8399 9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com