July 7, 2016 - 12:41 PM EDT
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Fitch Affirms Transocean Inc. at 'B+'; Outlook Negative

Fitch Ratings has affirmed Transocean Inc.'s (Transocean; NYSE: RIG) Long-Term Issuer Default Rating (IDR) at 'B+'. In addition, Fitch expects to rate the company's senior unsecured guaranteed notes 'BB'/'RR2' and has downgraded the senior unsecured notes to 'B'/'RR5' from 'B+'/'RR4'. The Rating Outlook remains Negative. A full list of rating actions follows at the end of this release.

Approximately $8.3 billion of debt, excluding the outstanding Eksportfinans loans, is affected by today's rating actions.

The issue level rating actions consider the structural seniority of the proposed senior unsecured guaranteed notes given the guarantee by Transocean Ltd. and Transocean Inc. subsidiaries that indirectly own substantially all of the group assets, as well as execution of the announced debt tender. Issuance of the proposed senior unsecured guaranteed notes will unfavorably impact recoveries at the unsecured level, which is reflected in today's downgrade of the existing senior unsecured notes. Fitch recognizes that the company may issue secured debt in the future that further subordinates existing debt classes which could result in additional rating actions. The company, as defined in its indenture, could incur secured debt of up to 10% of Consolidated Net Tangible Assets. For the most recent fiscal quarter, the maximum allowed secured debt capital under this covenant would be approximately $2.3 billion.

The Negative Outlook considers the heightened offshore rig re-contracting risk and potential for a deeper and longer than previously forecast offshore drilling downcycle. Fitch continues to estimate the recovery inflection point to be the second half of 2018 but understands this may change given the evolving hydrocarbon pricing environment, rig oversupply cycle, and offshore E&P spending trends. Fitch anticipates an uptick in rig tendering activity will lag supportive oil & gas price levels (estimated at $65 - $70/barrel for deepwater) by at least six to 12 months. Customer preference towards larger, established drillers could lead to somewhat higher utilization rates for Transocean relative to peers. Day rates, however, are anticipated to remain challenged and range-bound reflecting the market imbalance and economics required to put stacked rigs to work.

Transocean has undertaken numerous actions to manage its credit profile to-date including the early retirement of debt, eliminating the dividend, deferring uncontracted newbuild deliveries, proactively rationalizing uneconomic rigs (announced 25 scrapped or held for sale, about 50% of industry total), reducing operating costs, increasing rig uptime, and mitigating Macondo-related credit risks. Fitch expects the company to exhibit a near neutral free cash flow (FCF) profile in 2016, as well as continue to retire debt and maintain adequate liquidity over the next couple of years. This should help the company improve its near-term capital structure, but the declining cash flow and evolving asset profiles remain credit concerns.

KEY RATING DRIVERS

Transocean's ratings are supported by its market position as one of the largest global offshore drillers with a strong backlog ($14.6 billion as of April 21, 2016) and floater-focused rig fleet largely contracted with financially stronger international oil companies. The company's high-grading and margin improvement efforts and adequate near-term financial flexibility, including that afforded by the deferral of approximately $1.2 billion in uncontracted newbuild capex payments until 2020, also support the rating. These considerations are offset by the company's continued need to generate and conserve liquidity given the weak offshore rig market outlook, unfavorable capital market conditions, heightened maturities profile, and contracted newbuild capex commitments.

Fitch views management's proactive financial management as favorable. While the proposed issuance will structurally subordinate the existing unsecured notes, we note that the proceeds will be used to help improve the company's maturity and liquidity profiles during a challenged offshore drilling cycle. The proposed issuance and debt tender, if executed, should also help alleviate bank concerns heading into credit facility negotiations over the next couple of years.

Fitch believes the company's current (Fitch calculated year-ended 2015 debt/EBITDA of 1.9x) and near-term leverage profile are consistent with a higher rating. However, Fitch forecasts leverage metrics could exceed through-the-cycle levels over the rating horizon as current contract coverage declines meaningfully in 2017 with re-contracting risk elevated in this very weak market environment.

NEAR NEUTRAL FCF PROFILE; LEVERAGE METRICS RISING

Fitch's base case projects that Transocean, excluding cash flows to non-controlling interests, will have a near neutral-to-moderately negative FCF profile in 2016 and 2017. Fitch's base case results in consolidated debt/EBITDA, excluding cash-collateralized Eksportfinans loans, of 4.2x and 6.0x in 2016 and 2017, respectively. The increase in leverage metrics since our review in May 2016 is principally related to the addition of gross debt, while considering the realization of some principal discount from the tender offer.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Transocean include:

--Brent oil price that trends up from $35/barrel in 2016 to a longer-term price of $65/barrel;

--Current contracted backlog is forecast to remain intact with no renegotiations contemplated;

--Market day rates assumed to be $275,000 for higher-specification ultra-deepwater rigs with other rig classes seeing similarly steep price discounts;

--Fleet composition considers announced rig retirements and attempts to adjust for uncompetitive rigs due to their technological obsolescence, undifferentiated market position, or cost-prohibitive through-the-cycle economics;

--Capital expenditures consistent with company guidance of approximately $1.5 billion in 2016 with spending levels thereafter largely based on the current newbuild delivery schedule;

--No Transocean Partners LLC (NYSE: RIGP) dropdowns or other related funding activity;

--Issuance of $1.5 billion in senior unsecured guaranteed notes and execution of the debt tender.

RATING SENSITIVITIES

Positive: No positive rating actions are currently contemplated over the near term given the weak offshore oilfield services outlook. However, future developments that may, individually or collectively, lead to a positive rating action include:

For an upgrade to 'BB-':

--Demonstrated commitment by management to lower gross debt levels;

--Mid-cycle debt/EBITDA of below 5.0x on a sustained basis;

--Further progress in implementing the company's asset strategy to focus on the high-specification and ultra-deepwater markets.

To resolve the Negative Outlook at 'B+':

--Demonstrated ability to secure tenders that constructively contribute to the backlog and cash flows signalling the company's ability to manage the industry's re-contracting risk and bridge its financial profile through-the-cycle;

--Illustrated progress towards management's 2017 liquidity target of $4 billion - $5 billion, while repaying scheduled maturities;

--Mid-cycle debt/EBITDA of 5.0x-5.5x on a sustained basis.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Failure to manage FCF, repay near-term maturities, and retain adequate liquidity over the next few years;

--Material, sustained declines in rig utilization and day rates signalling a heightened level of re-contracting and recovery risk;

--Mid-cycle debt/EBITDA around 6.0x on a sustained basis.

ADEQUATE NEAR-TERM LIQUIDITY POSITION

Transocean had approximately $2.6 billion of cash and equivalents as of March 31, 2016. The company also had approximately $338 million in restricted cash investments associated with the required cash collateralization of the outstanding Eksportfinans loans and other contingent obligations. Supplemental liquidity is provided by the company's $3 billion senior unsecured revolving credit facility due June 2019, including a $1 billion sublimit for letters of credit. The company had $3 billion in available borrowing capacity on this facility as of March 31, 2016 with the ability to request a $500 million upsizing of the facility, subject to current, as well as any additional prospective, banks' willingness to participate. The company has the option to issue secured debt to further improve its liquidity.

HEIGHTENED MATURITIES PROFILE

Transocean has annual senior notes maturities equal to $974 million, $568 million, and $1 billion between 2016 and 2018. These represent the company's 5.05% senior notes due December 2016, 2.5% senior notes due October 2017, 6% senior notes due March 2018, and 7.375% senior notes due April 2018. This excludes Eksportfinans principal amortization that is cash-collateralized.

Management has been repurchasing debt in the open market over the past three quarters with cash on hand in an effort to incrementally improve near-term liquidity (majority of debt repurchases are related to the 2016-2018 maturities) by capturing a par discount (approximately $603 million in debt repurchased at a cost of $557 million) and reducing interest payments (aggregate interest savings of about $105 million through maturity). Fitch continues to forecast that the company can largely retire the scheduled near-term maturities with cash-on-hand and FCF.

Transocean, as provided in its bank credit agreement, is subject to a maximum debt-to-tangible capitalization ratio of 0.6x (0.35x as of March 31, 2016), excluding intangible asset impairments and certain other items. Other customary covenants consist of lien limitations and transaction restrictions.

MANAGEABLE OTHER LIABILITIES

Transocean maintains several defined benefit pension plans, both funded and unfunded, in the U.S. and abroad. As of Dec. 31, 2015, the company's funded status was negative $388 million. Fitch considers the level of pension obligations to be manageable, on a mid-cycle basis, and the U.S. benefits freeze helps to alleviate any future pension-related credit risks. Other contingent obligations primarily comprise purchase commitments totalling approximately $3 billion on a multi-year, undiscounted basis as of Dec. 31, 2015.

FULL LIST OF RATING ACTIONS

Fitch taken the following rating actions:

Transocean Inc.

--Long-Term IDR affirmed at 'B+';

--Senior unsecured guaranteed notes expect to rate 'BB'/'RR2';

--Senior unsecured notes/debentures downgraded to 'B'/'RR5' from 'B+'/'RR4';

--Senior unsecured bank facility downgraded to 'B'/'RR5' from 'B+'/'RR4'.

Global Santa Fe Inc.

--Long-Term IDR affirmed at 'B+';

--Senior unsecured notes downgraded to 'B'/RR5 from 'B+'/RR4.

The Rating Outlook remains Negative.

Additional information is available on www.fitchratings.com

Summary of Financial Statement Adjustments

Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008568

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008568

Endorsement Policy

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

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Fitch Ratings
Primary Analyst
Dino Kritikos
Director
+1-312-368-3150
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brad Bell, CFA
Associate Director
+1-312-368-3149
or
Committee Chairperson
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]


Source: Business Wire (July 7, 2016 - 12:41 PM EDT)

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