Fitch Downgrades Odebrecht-Sponsored Drilling Rig Transactions; Maintains Negative Watch
Fitch Ratings downgrades the senior secured notes issued by Odebrecht
Offshore Drilling Finance Ltd. (OODFL) to 'B-' from 'B+' and the senior
secured notes issued by Odebrecht Drilling Norbe VIII/IX Ltd. to 'B'
from 'BB-'. The ratings remain on Rating Watch Negative. A full list of
rating actions follows at the end of this release.
Fitch's downgrades reflect the following: (i) the termination of the ODN
Tay IV charter and services agreements by the off-taker, Petroleo
Brasileiro S.A. (Petrobras, 'BBB-', Negative Outlook), (ii) the impact
of Petrobras' additional reduction in capital expenditures (capex) on
its willingness to honor existing contracts upon a performance breach or
bankruptcy of the operator, and (iii) the impact of the ODN Tay IV
contract terminations on the credit quality of the sponsor.
The Negative Watch reflects the potential direct impact on OODFL if the
notes are either accelerated or restructured as a result of the
cancellation of the Tay IV charter and service agreements and the
sponsor's inability to re-charter the vessel or replace the asset by
December 23.
The Negative Watch on Odebrecht Drilling Norbe VIII/IX Ltd. reflects the
potential impact of the ODN Tay IV contract terminations, and the
potential acceleration of the OODFL notes, on the credit quality of the
sponsor which could affect the sponsor's ability to support the Norbe
VIII/IX transaction if needed. Additionally, the charter and services
agreements have termination clauses that include bankruptcy of the
sponsor; this risk may be heightened if the credit quality of the
sponsor deteriorates.
KEY RATING DRIVERS
Tay IV Contract Terminations
Petrobras cancelled the charter and services agreement for ODN Tay IV.
Cancellation of the Tay IV contracts further reduces cash flows to OODFL
and renders the transaction more dependent on cash reserves and sponsor
support to make future debt service payments. Continued depletion of
cash reserves will also increase the size of the balloon payment,
heightening refinancing risk. Failure to enter into a new contract or
replace the asset within 90 days may trigger an event of default and a
potential acceleration of the notes that could lead to the disposition
of the collateral.
In contrast, Norbe VIII and Norbe IX, the assets within Odebrecht
Drilling Norbe VIII/IX Ltd, continue to perform well, enabling the
transaction to pay expenses and timely debt service from cash flow
generated by contract payments.
Petrobras' Willingness to Honor Existing Contracts
As a response to depressed oil prices, currency devaluations and
increasing financial costs, Petrobras recently revised its business
plan. These new revisions include additional expense reductions of 11%
and 30% for 2015 and 2016, respectively. These are in addition to the
37% reduction announced in June 2015. As part of the measures, Petrobras
expects to reduce its active rig fleet to approximately 35 units from
the current 45 by releasing rigs coming off charter, releasing rigs that
have not met the performance thresholds, and placing a few rigs on
stand-by (while paying a reduced rate). In this regard, Petrobras will
continue to prioritize the most strategic and best operating assets
within the chartered fleet, which could potentially affect its
willingness to honor existing contracts.
Deteriorating Sponsor Credit Quality
The performance issues experienced by some of the rigs during 2014 and
2015 led to lower revenues and breach of performance triggers, trapping
cash within the OODFL transaction and preventing dividends from being
released to the sponsor. With the cancellation of the Tay IV contracts,
this is magnified and could add more pressure to OOG's liquidity
position, affecting its ability to support the transactions if needed
and increasing the reliance on OOG's shareholder support.
RATING SENSITIVITIES
The ratings are sensitive to changes in the credit quality of Petrobras
as offtaker, implications of the ongoing investigations into the
Odebrecht Group and resolution by the Office of the Controller General
of the Union (Controladoria Geral da Uniao - CGU) of the temporary ban,
changes in the credit quality of Odebrecht, and the operating
performance of the underlying assets. The ratings are also sensitive to
a potential acceleration or restructure of the OODFL notes and its
potential impact on the sponsor's financial profile and any potential
impact to the remaining contracts.
Additionally, the ratings are sensitive to changes in the Brazilian oil
and gas industry dynamics and Fitch's perception of Petrobras'
willingness to honor the existing conditions under the contracts.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to
this rating action.
TRANSACTION SUMMARY
The Odebrecht Drilling Norbe VIII/IX Ltd notes are backed by the flows
related to the charter and services agreements signed with Petrobras for
the use of the dynamically positioned ultra-deepwater (UDW) drillships
Norbe VIII and Norbe IX. The transaction also benefits from a naval
mortgage on the vessels.
The OODFL notes are currently backed by the flows related to the charter
and services agreements signed with Petrobras for the use of the
dynamically positioned UDW drillships ODN I and ODN II and the UDW
semi-submersible Norbe VI. The transaction also benefits from a naval
mortgage on the vessels, including the ODN Tay IV.
OOG is the operator of the drilling rigs and primary sponsor of the
transactions. OOG is the largest Brazilian operator of UDW rigs
chartered to Petrobras, with seven UDW rigs in its fleet.
Odebrecht Oleo e Gas (OOG, NR), the transaction's sponsor, may approach
the OODFL noteholders to renegotiate the terms of the notes as an
alternative to avoid an acceleration of the notes and in order to
preserve the integrity of the other three contracts. Fitch notes that
any potential exchange or restructure of the notes to avert probable
payment default and that may affect the economic terms, even if agreed
upon by the noteholders, may be considered by Fitch as a Distressed Debt
Exchange as described in Fitch's 'Global Structured Finance Distressed
Debt Exchange Criteria'
Fitch has downgraded the following ratings:
OODFL
--Series 2013-1 senior secured notes to 'B-' from 'B+';
--Series 2014-1 senior secured notes to 'B-' from 'B+'.
The ratings remain on Rating Watch Negative
Odebrecht Drilling Norbe VIII/IX Ltd.
--Series 2010-1 senior secured notes to 'B' from 'BB-'.
The ratings remain on Rating Watch Negative.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992140
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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