Fitch Downgrades Schahin II Finance Company (SPV) Limited's Sr. Secured Notes to 'D'
Fitch Ratings has downgraded the senior secured series 2012-1 notes
issued by Schahin II Finance Company (SPV) Limited to 'D' from 'CC'
following the recent missed payment of scheduled interest due in
September 2015. The Recovery Estimate (RE) is revised to 'RE50' from
'RE65'. The outstanding balance of the notes is approximately $651.5
The notes currently benefit from a naval mortgage on the vessel Sertao,
a dynamically positioned drilling unit that until April 2015 was
operating on the offshore waters of Brazil. Initially, the notes were
also backed by flows related to a long-term charter and services
agreement signed with Petroleo Brasileiro S.A (Petrobras: 'BBB-';
Outlook Negative) for the use of this drillship. Schahin Petroleo e Gas
was the original operator of the drilling rig, a new rig manager has
been recently appointed to act on behalf of the majority controlling
KEY RATING DRIVERS
Missed Scheduled Interest Payment: Fitch's rating action on the notes
follows the recent missed payment of scheduled interest due in September
2015. On Sept. 26, 2015 Fitch received notification from the indenture
trustee indicating that the majority controlling party had advised not
to make any payments on the September payment date on an attempt to
preserve the value of the collateral.
Outstanding Reserves: As of August 2015, the balance of the reserve
accounts was approximately $61.6 million with the $42 million related to
the debt service reserve account (DSRA) of which $40 million are in the
form of a letter of credit (LC). Cash in the reserve accounts was used
in September to make the following payments: (i) insurance fees, (ii)
Sertao's operating expenses, (iii) restructuring agent fees, and (iv)
transaction fees. The majority controlling party also instructed the
indenture to draw for the remaining amounts on the DSRA LCs.
Operator Replacement: On April 17, 2015 certain entities within the
Schahin group filed for recuperacao judicial resulting in a technical
event of default of the notes, this resulted in an operator replacement
event. In September 2015, the indenture trustee exercised its rights and
acting at the direction of the majority controlling party, terminated
Schahin Petroleo e Gas as Sertao's operator. A new rig manager, V.
Ships, has been appointed by the majority controlling party to assist in
the management of the vessel during the asset disposition process.
Fitch has revised the notes' RE to 'RE50' from 'RE65', reflecting an
estimate of the potential cash flows generated by the liquidation of the
assets under market conditions.
Fitch assigns REs to all classes rated 'CCC' or below. REs are
forward-looking, taking into account Fitch's expectations for principal
repayments on a distressed structured finance security. REs do not
reflect the actual recovery noteholders may get upon sale of the
underlying vessels or potential restructuring of the notes.
Offshore drillers have been facing softening market conditions due to
decreased demand and a significant backlog of newbuilds. The more than
50% drop in oil prices has compounded the effects of the oversupply
cycle, resulting in a decline in market dayrates of roughly 50% from
pre-cycle levels and heightened pressure on utilization rates. Fitch
continues to believe that medium-term demand will rebound and absorb
newer high-quality assets that operate more efficiently.
According to Fitch's estimates and considering potential legal fees,
mobilization fees and additional exportation costs, the agency has
revised the notes' REs to 'RE50'.
The 'D' rating will be withdrawn within 11 months of today's date.
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.
Criteria for Rating Oil Vessel-Backed Financing in Latin America (pub.
18 Dec 2014)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Dodd-Frank Rating Information Disclosure Form
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