January 11, 2016 - 3:35 PM EST
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Fitch Takes Actions on Odebrecht-Sponsored Drilling Rig Transactions

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 refinancing risk.

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 termination.

RATING SENSITIVITIES

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.

TRANSACTION SUMMARY

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 vessels.

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'.

RECOVERY ESTIMATES

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:

OODFL

--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.

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=997716

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997716

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, New York, +1-212-908-0526
[email protected]


Source: Business Wire (January 11, 2016 - 3:35 PM EST)

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