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 October 12, 2015 - 12:33 PM EDT
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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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992140

Solicitation Status
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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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, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com


Source: Business Wire (October 12, 2015 - 12:33 PM EDT)

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