Fitch Downgrades Odebrecht Norbe VIII/IX Ltd to ‘CCC’, Assigns ‘RE80’

Fitch Ratings has downgraded the series 2010-1 senior secured notes issued by Odebrecht Drilling Norbe VIII/IX Ltd. to 'CCC' from 'B' and assigned a recovery estimate (RE) of 'RE80' to the notes. A full list of rating actions follows at the end of this release.

The notes are backed by the flows related to the charter and services agreements signed with Petroleo Brasileiro S.A. (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 vessels. The transaction sponsor and operator of the drillships is Odebrecht Oleo e Gas S.A. (OOG), the oil and gas arm of the Odebrecht Group.

KEY RATING DRIVERS

The downgrade reflects the heightened risk of contract termination due to the deterioration in credit quality of OOG. Termination clauses within the underlying contracts for Norbe VIII and Norbe IX expose the transaction to potential bankruptcy of OOG. Petrobras has demonstrated a willingness to terminate existing charter agreements related to less strategic assets when a termination clause is breached.

On March 17, 2016, OOG exercised its right to a 30-day grace period with respect to a $9.6 million interest payment due on its 7.00% unsecured perpetual notes. OOG's credit profile has deteriorated during the last six months due to lower-than-expected dividends from its operating companies, including Odebrecht Offshore Drilling Finance Ltd., which has operated with reduced cash flows since cancellation of the Tay IV contracts.

RECOVERY ESTIMATE

Fitch has assigned a 'RE80' to the 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). REs are not intended to represent the actual recovery noteholders may get upon sale of the underlying vessels or potential restructuring of the notes.

RATING SENSITIVITIES

The ratings are sensitive to changes in the Brazilian oil and gas industry dynamics and Fitch's perception of the strength of the payment obligation. Additionally, the ratings are sensitive to changes in the credit quality of OOG and the operating performance of the underlying assets.

DUE DILIGENCE USAGE

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

Fitch has taken the following rating actions:

Odebrecht Drilling Norbe VIII/IX Ltd.

--Series 2010-1 senior secured notes downgraded to 'CCC' from 'B' and assigned a 'RE80'.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Criteria for Rating Oil Vessel-Backed Financings in Latin America (pub. 30 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875783

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=1001466

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001466

Endorsement Policy

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

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