Fitch Ratings has downgraded the senior secured notes issued by
Odebrecht Offshore Drilling Finance Ltd. (OODFL) to 'CCC', RE80 from
'B-' and affirmed the senior secured notes issued by Odebrecht Drilling
Norbe VIII/IX Ltd. at 'B'. Additionally, Fitch removes the ratings from
Rating Watch Negative and assigns Odebrecht Drilling Norbe VIII/IX Ltd.
a Negative Rating Outlook. A full list of rating actions follows at the
end of this release.
Fitch's downgrade of the OODFL notes reflects the following: (i)
liquidity challenges caused by the cancellation of the Tay IV contracts,
resulting in a decrease in the balance of the reserve accounts, (ii)
continued deterioration of the environment for offshore drillers, and
(iii) the sponsor's ongoing discussions with the OODFL noteholders that
have increased Fitch's concerns regarding a potential restructuring of
the notes. The rating also considers reduced risk of acceleration of the
notes that could have impacted the sponsor's financial profile.
A restructuring or exchange of the notes, resulting in a material
reduction in economic terms compared with existing contractual terms for
the noteholders, in an effort to avert a probable payment default would
result in a downgrade of the rating to 'D'. This would reflect the
occurrence of a distressed debt exchange according to Fitch's report
'Global Structured Finance Distressed Debt Exchange Criteria'.
The affirmation of the Odebrecht Drilling Norbe VIII/IX Ltd notes
reflects the following: (i) the reduced risk of a potential acceleration
of the OODFL notes, as a result of the forbearance agreement entered
with investors, that could have impacted the sponsor's financial
profile, (ii) the adequate performance of the underlying assets, and
(iii) Fitch's view of the strength of the payment obligation.
The Negative Outlook reflects the negative environment for offshore
drillers in Brazil.
KEY RATING DRIVERS
Increased Liquidity Pressure on OODFL
As previously noted by Fitch, cancellation of the Tay IV contracts
resulted in reduced cashflows to OODFL and increased dependence on cash
reserves and sponsor support to make debt service payments. Transaction
natural debt service coverage ratios (DSCR) have decreased below 1.0x.
OODFL partially used funds from the offshore sinking fund retention
account to meet its December's debt payment, reducing the balance of
this reserve account to approximately $22 million. The issuer must rely
on reserves and any sponsor support to make timely debt service
payments. As of September 2015, the total balance of the reserve
accounts is approximately $208 million. Continued depletion of cash
reserves will also increase the size of the balloon payment, heightening
Reduced Risk of Contagion
The sponsor entered into a forbearance agreement with the OODFL
noteholders to avoid the acceleration of those notes, reducing the risk
of an accelerated deterioration of the sponsor's credit profile which
could have potentially affected the sponsor's ability to support the
Norbe VIII/IX transaction if needed. 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.
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 remaining underlying assets have had an average
performance, recurrent periods of downtime would make the contracts more
vulnerable for a potential early termination. With current market
conditions and market day-rates for UDW assets close to the contracted
day-rates for the rigs within the sponsor's fleet, 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 values caused by stressed oil prices imply a low
likelihood that the underlying assets 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
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 of Petrobras' temporary ban review, changes in the
credit quality of Odebrecht, and the operating performance of the
underlying assets. The ratings are also sensitive to a potential
restructure of the OODFL notes.
Additionally, the ratings are sensitive to changes in the Brazilian oil
and gas industry dynamics and on 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.
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 transaction also benefits from a naval mortgage over the
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 over 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 operating 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. Fitch notes
that any potential exchange or restructure of the notes to avert
probable payment default and that may affect the economic terms of the
notes, 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 assigns a recovery estimate (RE) of RE80 to the OODFL notes. 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. Fitch's RE
considers estimated cash reserves and underlying asset values as
reflected by a discounted cash flow analysis of net revenues generated
during the remaining useful life of the contracted vessels (including
cashflows generated under the Petrobras' contracts) and potential
liquidation of Tay IV. REs are not intended to represent the actual
recovery noteholders may get upon sale of the underlying vessels or
potential restructuring of the notes.
Fitch has taken the following rating actions:
--Series 2013-1 senior secured notes downgraded to 'CCC', RE80 from 'B-'
--Series 2014-1 senior secured notes downgraded to 'CCC', RE80 from 'B-'
Odebrecht Drilling Norbe VIII/IX Ltd.
--Series 2010-1 senior secured affirmed at 'B'.
The Rating Outlook is Negative.
Additional information is available at www.fitchratings.com.
Criteria for Rating Oil Vessel-Backed Financings in Latin America (pub.
30 Dec 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Dodd-Frank Rating Information Disclosure Form
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