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Correction: Fitch Downgrades Odebrecht-Sponsored Drilling Rig Transactions; Places on Negative Watch

(This is a clarification of a release originally issued Sept. 14, which stated that the notification to Odebrecht Oleo e Gas S.A. (OOG) from Petrobras indicated an intention to cancel the Tay IV contracts. According to OOG, the Petrobras notification to OOG received on August 19th specifically stated that Petrobras reserved its rights to terminate the charter and services agreements for Tay IV as the vessel had not been operating for more than 60 days.)

Fitch Ratings, Chicago, 14 September 2015: Fitch Ratings downgrades the senior secured notes issued by Odebrecht Offshore Drilling Finance Ltd. (OODFL) to 'B+' from 'BB' and the senior secured notes issued by Odebrecht Drilling Norbe VIII/IX Ltd. to 'BB-' from 'BB'. In addition, Fitch places the ratings of both transactions on Rating Watch Negative. A full list of rating actions follows at the end of this release.

Fitch's downgrade reflects the following: (i) the impact of Petrobras' reduction in capital expenditures (capex) on its willingness to honour existing contracts upon a performance breach or bankruptcy of the operator, and (ii) the transactions' increased reliance on the sponsor which may continue suffering from decreasing revenues due to either poor assets' performance or non-operation of one of the rigs.

The Negative Watch reflects the potential outcome of the negotiations between Odebrecht Oleo e Gas S.A. (OOG; oil and gas arm of Brazilian-based Odebrecht Group) and Petrobras related to the notification received by OOG on August 19th, which according to the sponsor, specifically stated that Petrobras reserved its rights to terminate the charter and services agreements for Tay IV as the vessel had not been operating for more than 60 days. It also reflects the potential direct impact on OODFL, and OOG as sponsor to both transactions if the Tay IV charter and service agreements is terminated or restructured.

The rating differentiation between the Odebrecht-sponsored transactions reflects differing performance and degree of reliance on the sponsor.

KEY RATING DRIVERS

--Impact of Petrobras Capex Reduction on its Willingness to Honour Existing Contracts

Petrobras' 37% reduction in capex investments over the next five years has led the company to prioritize the most strategic and best operating assets within the chartered fleet. As a result, Petrobras may be inclined to cancel or restructure the contracts of poorly performing, less strategic offshore assets, particularly those with contracted day rates above current market rates. Petrobras' stated intention to terminate the contract for Tay IV as a result of extended downtime (more than 60 days) by the ultradeepwater (UDW) semi-submersible. While in the past, Petrobras may have showed a level of tolerance related to performance issues, this action signals the changing dynamics with the sector.

OODFL's Weak Performance and Heightened Reliance on Sponsor Support

Certain rigs related to OODFL have underperformed, resulting in reduced collections, lower debt service coverage ratios (DSCRs), and increased dependence on cash reserves and sponsor support. Potential cancelation of the Tay IV contract could further weaken OODFL's performance and even result in a technical event of default if not replaced within 90 days. In addition, continued depletion of cash reserves will increase the size of the balloon payment, heightening refinancing risk.

In contrast, Norbe VIII and Norbe IX, the assets within Odebrecht Drilling Norbe VIII/IX Ltd, have performed well, enabling the transaction to pay expenses and timely debt service from cash flow generated by contract payments.

Positively, OOG was asked by Petrobras to re-register as a qualified oil service provider. While the CGU Lava-Jato investigations have yet to conclude and OOG is still temporarily banned from entering new contracts, this development is a good indication that the company may be soon permitted to enter into new contracts with Petrobras.

Potential Termination of Tay IV Contract

The current ratings are supported by ongoing cashflows from payments under the long-term agreements and cash reserves or sponsor support if necessary. The Petrobras notification indicating it reserved its rights to terminate the Tay IV contract increases risk in this transaction; if the underlying charter and service agreements are terminated or restructured, the transaction could be exposed to depressed market conditions.

Although termination of the Tay IV charter and services agreements is a possibility, the contracts could be reinstated or the terms of the existing contracts may be renegotiated. Transaction features and available liquidity may guarantee timely payment of debt service and still support a decrease in dayrates, but ultimately the transaction may need the support of the sponsor if there is any negative impact on the economics of the contracts.

RATING SENSITIVITIES

The ratings are sensitive to changes in the credit quality of Petrobras as offtaker, implications of the ongoing investigations on the Odebrecht Group and resolution by the Office of the Controller General of the Union (Controladoria Geral da Uniao - CGU) of the temporary ban review, changes in the credit quality of Odebrecht, and the operating performance of the underlying assets.

Additionally, the ratings are sensitive to changes in the Brazilian oil and gas industry dynamics and on Fitch's perception of Petrobras' willingness to honour 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 UDW drillships Norbe VIII and Norbe IX. The OODFL notes are 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-submersibles Norbe VI and 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 operating UDW rigs in its fleet.

Fitch has downgraded the following ratings:

OODFL

--Series 2013-1 senior secured notes to 'B+' from 'BB'; Placed on Rating Watch Negative;

--Series 2014-1 senior secured notes to 'B+' from 'BB'; Placed on Rating Watch Negative.

Odebrecht Drilling Norbe VIII/IX Ltd.

--Series 2010-1 senior secured notes to 'BB-' from 'BB'; Placed on Rating Watch Negative.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Criteria for Rating Oil Vessel-Backed Financing in Latin America (pub. 18 Dec 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=834309

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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Fitch Ratings
Primary Analyst:
Cinthya Ortega, +1-312-606-2373
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Committee Chairperson:
Greg Kabance, +1-312-368-2052
Managing Director
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (September 16, 2015 - 4:36 PM EDT)

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