Fitch Downgrades Odebrecht-Sponsored Drilling Rig Transactions; Places on Rating Watch Negative
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 announcement by Petroleo Brasileiro S.A.
(Petrobras) of its intention to terminate the contract for Tay IV and
its potential direct impact on OODFL, and Odebrecht Oleo e Gas S.A.
(OOG; oil and gas arm of Brazilian-based Odebrecht Group) as sponsor to
both transactions.
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 announcement by Petrobras of their intention to terminate
the Tay IV contract increases risk in this transaction; if the
underlying charter and service agreements is 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
Additional Disclosures
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990788
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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