Fitch: Contract Renegotiation Could Pressure QGOG Constellation's Ratings

CHICAGO--()--QGOG Constellation S.A.'s Long-term rating of 'BB-'/Negative Outlook could be pressured by the contract renegotiation with Petrobras S.A. (IDR 'BB+'/Outlook Negative), according to Fitch Ratings. Petrobras has sent the company a letter requesting a discussion of the terms and conditions of its contracts. In light of market conditions and Petrobras' cash flow generation pressures, the renegotiation of existing day rates had been considered probable by Fitch.

Collective contract renegotiations are likely to diminish QGOGO Constellation's near-term cash flow relative to earlier Fitch projections. Given the company's strong liquidity position and low leverage, moderate declines in average day rates would likely be manageable at the existing rating level. These negotiations could lead to additional clarity about the longer-term contractual situation of QGOG. This would be positive, as most of the company's offshore contracts, except for Alaskan Star and Olinda Star, expire during 2018. A material decrease in day rates could pressure revenues and cash flow generation, which would weaken QGOG Constellation's credit quality and could lead to a negative rating action.

QGOG Constellation leverage has rapidly declined over the past two years with total debt to EBITDA declining to 3.8 times (x) as of December 2015 from approximately 5.0x and 7.8x as of yearend 2013 and 2012, respectively. Fitch expected QGOG Constellation to continue reducing its leverage over the next few years and to maintain its consolidated leverage ratio below 4.0x. The company's leverage could increase beyond Fitch's initial expectation as a result of a contract renegotiation that impacts its cash flow generation in the short-term and may result in negative rating actions.

Considerations that could lead to a downgrade include an increase in leverage above 4.0x or a negative rating action on Petrobras, QGOG Constellation's sole offtaker. A positive rating action is not expected in the short- to medium-term.

Additional information is available on www.fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Alexandre Garcia
Associate Director
+5511-4504-2616
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Alexandre Garcia
Associate Director
+5511-4504-2616
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com