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 December 18, 2015 - 4:57 PM EST
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Fitch Downgrades QGOG Atlantic / Alaskan Rigs Ltd. Notes to 'BB-'; Outlook Negative

Fitch Ratings downgrades the senior secured notes issued by QGOG Atlantic / Alaskan Rigs Ltd. as follows:

--Series 2011-1 senior secured notes due 2019 to 'BB-' from 'BB'; Outlook remains Negative.

The notes are backed by the flows related to the charter agreements signed with Petroleo Brasileiro (Petrobras) for the use of the moored semi-submersibles Atlantic Star and Alaskan Star. Queiroz Galvao Oleo e Gas S.A. (QGOG) is the operator of the vessels and QGOG Constellation S.A. (QGOG Constellation) is the primary sponsor of the transaction.

The downgrade to the senior secured notes reflects the downgrade to Petrobras (the offtaker) and Fitch's weakening view of the strength of the offtaker's payment obligation given continued pressure on global day-rates and asset values caused by stressed oil prices and Petrobras' willingness to terminate existing charter agreements in the event of a contract breach.

The ratings continue to benefit from strong asset performance and QGOG's position as one of Petrobras' top performing service providers, the underlying long-term contracts, and the credit quality of QGOG Constellation. The Negative Outlook reflects the Negative Outlook on the sponsor's rating and the negative environment for offshore drillers, specifically less attractive demand fundamentals for the underlying rigs.

KEY RATING DRIVERS

-- Petrobras' Credit Quality

On Dec. 17, 2015, Fitch downgraded the foreign and local currency Issuer Default Ratings (IDRs) of Petrobras to 'BB+' from 'BBB-'. The rating actions follow Fitch's downgrade of Brazil's sovereign foreign and local currency IDRs to 'BB+' from 'BBB-'. The Rating Outlook on the sovereign is Negative. The offtaker's IDR is the starting point for determining the strength of the offtaker's payment obligation.

-- Fitch's View of the Strength of the Payment Obligation

Petrobras has demonstrated a willingness to terminate existing charter agreements related to less strategic assets when a termination clause is breached. Although the Atlantic Star and Alaskan Star have historically performed well, these second-generation mid-water vessels are older and less strategic than ultra-deepwater (UDW) rigs and equipment related to production, and therefore may be more vulnerable to contract renegotiation or termination. With current market conditions and market day-rates for newer UDW assets close to the contracted day-rates for the Alaskan Star and Atlantic Star, Petrobras may approach the operator in an attempt to restructure certain contracts to reduce expenses over the medium term. Continued pressure on global day-rates and asset value caused by stressed oil prices imply a low likelihood that the Atlantic Star and Alaskan Star would be re-contracted in today's environment outside of Brazil and underline the importance of a strong operating performance to avoid any performance-related contract termination.

-- Strong Asset Performance

Both the Atlantic Star and Alaskan Star have returned to normal operations in line with strong historical performance after suffering idiosyncratic downtime during the first half of 2015. Uptimes for the Atlantic and the Alaskan averaged 95% and 92%, respectively, during the first three quarters of 2015. During 2013 and 2014, performance of both was excellent, with both vessels recording average uptime levels near 99%. Although both assets have performed well and QGOG is one of the best operators in Petrobras' fleet, Fitch believes that given the nature of the assets and the contracted day-rates, these charter and services agreements are exposed to early termination in the event of poor performance.

-- Credit Quality of QGOG Constellation

Fitch rates QGOG Constellation 'BB-' with a Negative Outlook. The transaction is directly and indirectly exposed to the credit quality of QGOG Constellation as the charter and service agreements have termination clauses relating to bankruptcy and performance, and therefore are linked to the credit quality of this entity. Positively, on Nov. 30, 2015, the company announced that the Brazilian Comptroller General's Office (CGU; Controladoria Geral de Uniao) decided to exclude QGOG from the administrative procedure that the CGU initiated in connection with the Petrobras investigations.

-- Decreasing Leverage Limits Exposure to Stressed Market

Exposure to market day-rates and depressed asset values is mitigated, since the transaction maintains cash reserves and continues to de-lever at a relatively fast pace.

RATING SENSITIVITIES

The ratings are sensitive to changes in the credit quality of Petrobras as offtaker, changes in the credit quality of QGOG Constellation, and the operating performance of the underlying assets. Additionally, the ratings are sensitive to changes in Brazilian oil and gas industry dynamics and overall market dynamics for midwater assets, and Fitch's perception of the strength of the payment obligation.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

Additional information is available at www.fitchratings.com.

Applicable Criteria

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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997100

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997100

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com


Source: Business Wire (December 18, 2015 - 4:57 PM EST)

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