Fitch Expects to Rate OODF's 2014-1 Notes 'BBB(EXP)'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to assign the following rating to the proposed issuance of additional notes by Odebrecht Offshore Drilling Finance Ltd. (OODF, the Issuer), a multi issuance company setup in the Cayman Islands (Cayman):
--Up to USD580 million series 2014-1 senior secured notes: 'BBB(EXP)'; Outlook Stable.
Additionally, Fitch Ratings has affirmed the rating assigned to the 2013-1 notes issued by OODF as follows:
--USD1,690 million senior secured notes series 2013-1 at 'BBB'; Outlook Stable.
Fitch's ratings address the likelihood of timely payment of interest on a quarterly basis and payment of principal considering the potential for two quarterly principal payment deferrals. The outstanding balance of the program, including series 2013-1 and 2014-1 notes, as of the date of the second funding is expected to be US$2.2 billion. The first debt service payment for the combined transaction is scheduled for June 1, 2014. Expected maturity date for both series is October 2022.
At closing of the series 2014-1 notes, the program will benefit from an additional collateral package, including a naval mortgage on the ultra deepwater (UDW) semi-submersible rig ODN Tay IV and a pledge of the shares of ODN Tay IV GmbH (owner of the rig Tay IV). Series 2013-1 and 2014-1 notes will be pari passu and share all the collateral. The original Guarantors (ODN I GmbH (owner of ODN I and ODN II) and ODN Six GmbH (owner of Norbe VI)) and the Additional Guarantor (ODN Tay IV GmbH (owner of ODN Tay IV)) will jointly and severally guarantee the payment and performance of both series.
The program will be backed by the flows related to the charter and services agreements signed with Petroleo Brasileiro S.A. (Petrobras) for the use of the dynamically positioned UDW drillships called 'ODN I' and 'ODN II' for the term of 10 years and the UDW semi-submersibles called Norbe VI and ODN Tay IV, for the term of seven years. Odebrecht Oleo e Gas S.A. (OOG), oil and gas arm of Brazilian-based Odebrecht Group (Odebrecht), is the operator of the drilling rigs and primary sponsor of the transaction. The proceeds of the issuance of series 2014-1 notes will be mainly used to refinance the existing loan attached to ODN Tay IV GmbH.
This expected rating does not incorporate Fitch's full legal analysis as this process is currently ongoing and the final rating is contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
The 'BBB(EXP)'/Outlook Stable expected rating for series 2014-1 notes and the 'BBB'/Outlook Stable rating for series 2013-1 notes reflect the following key drivers:
Credit Quality of the Offtaker: Petrobras' rating is the implied cap for drilling rig transactions in which it acts as offtaker as it is the main source of cash flow generation. Petrobras carries local and foreign currency issuer default ratings (IDR) of 'BBB.' The company is controlled by the federal government of Brazil and has the rights to exploration and production (E&P) of the vast majority of Brazil's oil fields.
Conditionality and Revocability of the Charter Agreement: The services and charter agreements backing this transaction are joint and several and revocable under specific events. Extended periods of downtime or bankruptcy of the operator allow for cancellation of the agreements adding potential volatility to the cash flows.
Rechartering Risk: The existing charter and services agreements, for both Norbe VI and ODN Tay IV, expire before the maturity of the notes. This exposure is mitigated by: (i) current market day rate levels significantly above the current contract's day rate; (ii) market forecasts on the supply and demand fundamentals for UDW rigs; (iii) the Petrobras E&P plans and the challenges to delivery of the 28 drilling rigs scheduled for 2016-2020; and (iv) the liquidity mechanisms embedded in the transaction.
Credit quality of the operator: The operator's credit quality is considered, as the contracts have termination clauses related to the bankruptcy of the operator/sponsor and the operator's financial position might constrain its ability to operate the vessel through the life of the transaction. OOG is the largest Brazilian operator of UDW rigs chartered to Petrobras, with seven operating UDW rigs in its fleet, Fitch believes this mitigates the transaction's exposure to bankruptcy of the operator.
Positive Supply and Demand Fundamentals: The Federal Government of Brazil and Petrobras have passed several initiatives seeking the development of the local oil and gas industry. UDW rigs are essential assets for continued research and development of new oil fields in Brazil. Investments by Petrobras and regulation/legislation imposed by the government should continue to provide a stable credit environment for sponsors and protect value of these assets.
Adequate Leverage and Refinance Risk: Fitch's adjusted valuation of the rigs indicates an initial loan to value (LTV) at the moment of the second issuance of 68.19% and a net LTV of approximately 64.64%. Debt service coverage ratios (DSCR) are expected to average 1.26x under Fitch's base case scenario. In order to mitigate refinancing risk, a dividend retention mechanism will begin 46 months prior to the expected maturity date. LTVs net of liquidity, rechartering and balloon payment reserve amounts is 19.32%, using Fitch's valuation approach. These metrics are in line with an investment grade rating according to Fitch's 'Criteria for Rating Oil-Vessel Backed Financing in Latin America'.
Diversified Portfolio: The multiple-asset nature of this transaction provides additional protection should a temporary problem occur with one vessel, as the other ones can continue generating cash flows to honor timely debt service payments. Additionally, this transaction incorporates mitigation mechanisms, including additional liquidity, and business-interruption insurance to mitigate the exposure to a single asset.
Guarantees in Place: The transaction benefits from a pledge of the shares of the companies that own the rigs and from mortgages on the individual rigs. Under certain events, the transaction may seize and dispose of the vessels to repay the outstanding balance of the notes. The transaction structure also allows for the substitution of OOG as operator of the vessel.
The ratings are sensitive to changes in the credit quality of Petrobras, as offtaker to the charter and services agreements. The foreign currency (FC) IDR assigned to Petrobras acts as the implied cap to drilling rig transactions in which it acts as offtaker. In addition, the expected rating is sensitive to the operating performance of the rigs. Extended periods of downtime, which lead to the revision of Fitch's expected uptime assumption of 95%, would result in lower debt service coverage ratio (DSCR) expectations and potentially result in rating downgrades.
A detailed description of the criteria application will be provided in Fitch's presale report titled Odebrecht Offshore Drilling Finance Ltd. Series 2014- 1' available shortly at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
The information and documentation used to assess the rating was provided by Odebrecht Oleo e Gas S.A., IHS Inc., ABSG Consulting Inc., GL Noble Denton and Okeanos BV.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (June 19, 2013).
--'Criteria for Rating Oil Vessel 'Backed Financing in Latin America' (Jan. 13, 2014)
--'Odebrecht Offshore Drilling Finance Ltd.- Senior Debt, Series 2013-1' (Aug. 22, 2013)
Applicable Criteria and Related Research:
Odebrecht Offshore Drilling Finance Ltd.
Global Structured Finance Rating Criteria
Criteria for Rating Oil Vessel-Backed Financing in Latin America