Press Release: Fitch Downgrades Odebrecht-Sponsored Drilling Rig Transactions; Outlook Negative
5:22 pm ET July 9, 2015 (Dow Jones) Print
The following is a press release from Fitch Ratings:
Fitch Ratings-Chicago-09 July 2015: Fitch Ratings downgrades and removes from Rating Watch Negative the senior secured notes issued by Odebrecht Drilling Norbe VIII/IX Ltd. and Odebrecht Offshore Drilling Finance Ltd. (OODFL) to 'BB' from 'BB+'. The Rating Outlook is Negative. A full list of rating actions follows at the end of this press release.
The rating actions reflect: (i) the credit quality of the Odebrecht group, (ii) Fitch's view related to Petroleo Brasileiro S.A. (Petrobras') willingness to honor underlying charter and service agreements in the event of a performance-related breach; (iii) the continued pressure on global day rates and asset values caused by stressed oil prices and changes in worldwide supply and demand dynamics; (iv) heightened medium-term re-chartering risk, and (v) still weak albeit improving performance of certain assets backing OODFL.
The ratings are ultimately supported by the underlying long-term contracts with Petrobras, and the growing importance of Odebrecht Oleo e Gas S.A. (OOG, oil and gas arm of Brazilian-based Odebrecht Group) as an oil service provider. Furthermore, the majority of the vessels backing these transactions are state of the art ultra-deepwater (UDW) assets. While day rates within the Odebrecht fleet remain within the median of similar vessels contracted by Petrobras, the continued decline in global day rates may increase the risk of contract restructuring or termination, as reflected by the Negative Outlook. The Negative Outlook also reflects uncertainties related to Petrobras and the ongoing Lava-Jato investigations.
KEY RATING DRIVERS
Sponsor's Credit Quality
On June 30, 2015 Fitch downgraded the Issuer Default Ratings of Odebrecht Engenharia e Construcao S.A., one of the most relevant entities within the Odebrecht Group, from 'BBB' to 'BBB-' and assigned the ratings a Negative Outlook.
The structured transactions are directly and indirectly exposed to the credit quality of OOG and the overall Odebrecht group. The charter and service agreements have termination clauses that include bankruptcy of the sponsor and performance-related deficiencies, such as extended down time. Furthermore, due to the operating nature of the asset, sponsor support may be needed in cases of extended downtime, extraordinary capital expenditures (capex) needs or increasing operating expenses.
Willingness to Honor Existing Charter & Services Agreements
Petrobras has indicated its intention to continue honoring the terms of existing charter and services agreements; however, the company recently announced a 37% reduction in capex investments over the next five years. Although the exploration and production (E&P) contracts remain strategic capex investments and the bulk of Petrobras' fleet relates to production, Petrobras will likely favor the most strategic and best operating assets within its chartered fleet. Additionally, Petrobras may approach operators in an attempt to restructure certain contracts to reduce expenses over the medium term. While contracted day rates within the Odebrecht fleet remain below the median of dayrates within similar vessels contracted by Petrobras, the continued decline in global day rates may increase the risk of contract restructuring.
Exposure to Depressed Asset Prices
The current ratings are supported by the stability of cashflows expected to be generated under the existing Petrobras contracts. While Fitch does not expect these existing contracts to be terminated, the ongoing Lava-Jato investigations of the Odebrecht group heightens this risk.
Global day rates continue to decrease and the secondary market remains illiquid given the oversupply of UDW drilling rigs. Therefore, if the underlying charter and services agreements are terminated, the transactions may be exposed to current depressed market conditions.
Heightened Re-chartering Risk
OODFL is exposed to some element of re-chartering risk as two of the four assets backing the transaction are scheduled to expire in 2019 (Norbe VI) and 2020 (Tay IV), prior to the scheduled maturity of the program. While Fitch does not believe the current ban will ultimately impact the ability to re-charter in three years, it remains uncertain what impact this may have on OOG's future contracting with Petrobras. Furthermore, the recent decline in oil prices will negatively impact the day rates under which Norbe VI and Tay IV will ultimately be able to contract.
Performance Affecting DSCRs
Fitch believes the overall OOG fleet has shown some improvement in performance, but certain rigs related to OODFL have experienced isolated periods of extended downtime during 2014 and 2015 (see 'ASSET PERFORMANCE UPDATE' below for more detail). Not only does prolonged downtime increase the potential for contract termination, it causes a decrease in collections and debt service coverage ratio (DSCR) levels. The 12-month rolling DSCR for the previous four quarters (1.29x, 1.07x, 0.99x and 1.02x, respectively) averaged 1.09x through 2Q'15, below the 1.15x DSCR trigger for a cash retention event. As a result no dividends were released to OOG and the cash was trapped within the structure.
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 by the Brazilian General Comptroller (CGU) of the temporary ban review, changes in the credit quality of Odebrecht, and the operating performance of the underlying assets.
Additionally, the ratings are sensitive to changes in the Brazilian oil and gas industry dynamics and on Fitch's perception of Petrobras' willingness to honor the existing conditions under the contracts.
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 OODFL 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 ODN I and ODN II and the UDW semi-submersibles Norbe VI and 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.
ASSET PERFORMANCE UPDATE
During 2015, Norbe VIII and Norbe IX have performed well. During the first quarter of 2015 both vessels operated at performance operating levels of 94.7% and above 99%, respectively. In both cases, bonus payment was received during such period, resulting in economic uptimes of 95.2% and 107%, respectively.
During 1Q'15, some of the assets backing OODFL experienced performance challenges. Operational uptime levels were 81.9%, 95.7%, 84.8%, and 91.3% for ODN I, ODN II, Norbe VI and Tay IV, respectively. ODN II's relatively low average uptime during 1Q'15 was caused by electrical problems with the BOP. Norbe VI experienced some down time due to bad weather. OOG expects to reclassify the 56 hours of downtime as 'awaiting weather hours' (as permitted under the contract), which would result in a higher uptime as the day rate would be paid at 90% the contracted day rate for such period.
Fitch has downgraded the following ratings:
OODFL
--Series 2013-1 senior secured notes to 'BB' from 'BB+'; Outlook Negative;
--Series 2014-1 senior secured notes to 'BB' from 'BB+'; Outlook Negative.
Odebrecht Drilling Norbe VIII/IX Ltd.
--Series 2010-1 senior secured notes to 'BB' from 'BB+'; Outlook Negative.
