Reuters logo
Fitch Rates Transocean Inc.'s Unsecured Guaranteed Notes 'BB/RR2'
October 4, 2017 / 9:08 PM / in 2 months

Fitch Rates Transocean Inc.'s Unsecured Guaranteed Notes 'BB/RR2'

(The following statement was released by the rating agency) CHICAGO, October 04 (Fitch) Fitch Ratings has assigned a 'BB/RR2' rating to Transocean Inc.'s (NYSE: RIG) issuance of unsecured guaranteed notes due 2026. Proceeds from the notes will be used to repay or redeem the 2017 and 2018 maturities and for general corporate purposes. The notes will rank pari passu with Transocean's existing unsecured guaranteed debt. Fitch recognizes that the notes offering will increase forecasted base case consolidated gross debt metrics around 0.5x, but consolidated net leverage metrics will remain relatively unchanged over the next few years. Fitch's base case, on a pro forma basis for the announced notes and Songa Offshore transactions, results in debt/EBITDA of 7.2x and 5.6x on a gross and net debt basis, respectively, in 2018. Fitch believes the access to capital markets and, as a consequence, increased cash position, should help moderate the medium-term probability of default. Another consideration is that the transaction further supports credit facility renegotiation prospects. KEY RATING DRIVERS Songa Transaction Supports Strategic Financial Initiatives: Transocean recently announced the acquisition of Songa Offshore, which owns seven harsh-environment, ultra-deepwater floaters (three stacked), for a total enterprise value of approximately $3.4 billion. The four working rigs are under long-term contracts with Statoil, favorably providing approximately $4.1 billion of backlog. Fitch believes the transaction supports the company's strategic and financial initiatives by high-grading assets with a core offshore customer in an operationally attractive region, while improving the forecasted leverage profile. Weak Offshore Rig Market: Fitch continues to believe the offshore driller recovery will be protracted with an estimated recovery inflection point of second-half 2018. In addition, Fitch anticipates the floater market rebalance will be more orderly than the jackup market. The shorter-cycle, lower break-even cost of shallow water projects suggests the jackup market will realize an earlier uptick in demand, which is beginning to materialize. However, the more diversified operator and customer base, as well as relatively low rig carrying costs, indicate tendering will be more competitive, making material day-rate increases elusive without a strong demand recovery or considerable scrapping activity. The longer-cycle, higher gross development cost of deepwater projects is anticipated to result in a demand lag. However, Fitch believes the more concentrated floater customer base will result in a demand-driven floater recovery with preference toward larger, established drillers. Another consideration is the relatively high rig carry-cost, which will financially force some market participants to retire uncompetitive floaters. Day rates are anticipated to remain challenged and range-bound reflecting the market imbalance and economics required to reactivate stacked rigs. Consolidation is likely necessary for rig supply to better align with the lower expected mid-cycle rig demand. However, drillers seem reluctant to take meaningful steps toward consolidation given the uncertain timing of an offshore recovery, wide bid-ask spreads, a general need to use dilutive equity currency, and liquidity and balance sheet risks. Fitch has observed some consolidation activity but believes that the proposed acquisition funding and backlog of Songa Offshore mitigates some of these consolidation considerations. Positive FCF; Widening Metrics: Fitch's base case projects that Transocean, on a pro forma basis for the announced notes and Songa Offshore transactions, will be approximately $325 million and $500 million FCF positive in 2017 and 2018, respectively. Fitch's base case, on a pro forma basis for the announced notes and Songa Offshore transactions, results in debt/EBITDA of 7.2x and 5.6x on a gross and net debt basis, respectively, in 2018. Fitch recognizes that the secured notes, as well as any potential future secured note issuances, structurally subordinate contracted cash flows to service corporate debt and believes that adjusted corporate leverage metrics, excluding rig secured debt and associated cash flows, could rise above the consolidated metrics. Security Supports Notes Ratings: Fitch's corporate recovery analysis uses an $875 million sustainable, post-default EBITDA reflecting the potential for additional rig fleet rationalization and a prolonged period of challenged and range-bound day rates. Fitch assumed a relatively conservative 5x EBITDA multiple that considers recent market transactions and historical distressed asset sales. The estimated going concern value was discounted by 15% for administrative and priority claims given the large, global nature of the company's asset base. The distributable value was allocated to the guaranteed unsecured and unsecured debt, plus any assumed corporate unsecured recovery claims associated with the secured debt, based on relative security, The secured debt recovery uses a $60 million sustainable, post-default EBITDA reflecting contract performance and renegotiation risks during a weak offshore rig market environment and a 5x multiple. The senior unsecured guaranteed notes (BB/RR2) have structural seniority given the guarantee by Transocean Ltd. and Transocean Inc. subsidiaries that indirectly own substantially all of the group assets. The Transocean Phoenix 2 and Transocean Proteus secured debt ratings (BB-/RR3) consider the structural seniority of the notes given the lien on the Deepwater Thalassa and Proteus and certain other assets related to the rigs, as well as guarantees by Transocean Ltd., Transocean Inc., and a wholly owned indirect subsidiary that owns each respective ultra-deepwater (UDW) rig, operating under a 10-year Shell (AA-/Negative Outlook) contract. Fitch views the guarantee as an additional (secondary) payment support that is essentially a payment-put to the extent the contracted cash flows are insufficient to repay the secured notes. The supportive contract features, strong operating history, and favorable contract performance history between Transocean and Shell provide a level of confidence in the UDW rigs' ability to independently meet its annual debt service. However, contract performance and renegotiation as well as refinance risks remain. DERIVATION SUMMARY Transocean's ratings are supported by its market position as one of the largest global offshore drillers with a strong backlog ($10.2 billion as of July 25, 2017; pro forma $14.3 billion) and exclusively floater-focused rig fleet (pro forma 49 total rigs with 19 stacked) largely contracted with financially stronger international oil companies. The size and length of the company's backlog contrasts sharply with peers that generally have smaller backlogs which exhibited considerable declines in the 2018-2019 timeframe. This favorable backlog profile provides substantial financial flexibility during a deep cyclical downturn. Transocean has also proactively high-graded and focused its fleet via rationalization (39 floaters removed from the marketed fleet as of Sept. 22, 2017), divestiture (jackup fleet), and M&A (pending Songa Offshore acquisition; 4 contracted 'Cat-D' and 3 stacked harsh-environment, semisubmersible rigs) activities. While several peers have also taken steps to competitively position their fleets, Transocean has generally taken a more robust view of its fleet that seems to support their strategic, operational, and financial goals. Nevertheless, Transocean, generally consistent with its offshore rig peers, has a considerable debt burden and continued need to generate and conserve liquidity given the weak offshore rig-market outlook, unfavorable capital market conditions, heightened maturities profile, and newbuild capex commitments. Fitch recognizes, however, that the company is among the only offshore drillers that is managing its long-term capital structure through-the-cycle, as well as increasing its exposure to contractually linked amortizing debt. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Brent oil price that trends up from $52.50/barrel in 2017 to a longer-term price of $57.50/barrel; --Pro forma contracted backlog is forecast to remain intact with no material renegotiations; --Market day-rates assumed to be at or near cash breakeven levels; --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 of approximately $500 million, $165 million, and $190 million in 2017, 2018, and 2019, respectively, plus Songa Offshore spending generally consistent with recent levels over the next couple of years; --Songa Offshore acquisition completed by YE2017 assuming the announced transaction funding, including approximately $660 million convertible bond, $540 million Transocean equity, and $480 million cash; --No additional Shell UDW secured debt issuances. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action 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 UDW 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; --Continued progress toward generating and preserving liquidity; --Mid-cycle debt/EBITDA of 5.0x-5.5x on a sustained basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Failure to manage FCF, repay near-term maturities, and retain adequate liquidity over the next few years; --Additional issuance of secured debt that structurally subordinates contracted newbuild cash flows resulting in materially lower corporate cash flows; --Material, sustained declines in rig utilization and day rates signaling a heightened level of re-contracting and recovery risk; --Mid-cycle debt/EBITDA around 6.0x on a sustained basis. LIQUIDITY Adequate Liquidity Profile: Transocean has cash and cash equivalents of approximately $2.5 billion as of June 30, 2017 and restricted cash of $537 million, some of which is held as cash collateral for the Eksportfinans Loans and for security of certain other credit arrangements. Pro forma cash and equivalents, including cash consideration for the Songa Offshore transaction, is approximately $2 billion as of June 30, 2017. The company has the potential for additional cash associated with the monetization of the two to-be-delivered Shell newbuild rigs (recent Shell secured debt transactions resulted in approximately $600 million and $625 million per rig). Supplemental liquidity is provided by the company's $3 billion senior unsecured revolving credit facility due June 2019. The company had $3 billion in available borrowing capacity on this facility as of June 30, 2017. Fitch believes Transocean has solid credit facility renegotiation prospects given its cash position, manageable maturity profile, and secured debt capacity (Fitch-calculated secured debt capacity of around $200 million; pro forma of about $500 million following the Songa acquisition). Proactive Maturity Management: Transocean has annual senior unsecured notes maturities equal to approximately $152 million, $401 million, $292 million, and $332 million in 2017, 2018, 2020, and 2021, respectively. These represent the company's 2.5% senior notes due October 2017, 6% senior notes due March 2018, 7.375% senior notes due April 2018, 6.5% senior notes due November 2020, and 6.375% senior notes due December 2021. Proceeds from the announced notes offering will be used to repay or redeem the 2017 and 2018 maturities. This excludes rig-level secured debt principal amortization that effectively has contract-linked payments. Management has been proactively tendering and repurchasing debt in the open market over the past couple of years in an effort to incrementally improve the near-term liquidity and maturity profiles by reducing interest payments and, in some instances, capture a par discount. Headroom Under Current Covenants: Transocean, as provided in its bank credit agreement, is currently subject to a maximum debt-to-tangible capitalization ratio of 0.6x (0.34x as of June 30, 2017), excluding intangible asset impairments and certain other items. Other customary covenants consist of lien limitations and transaction restrictions. Additionally, the Shell UDW secured notes contain covenants that limit the ability of the borrowing subsidiaries to declare or pay dividends, and impose a maximum collateral rig leverage ratio of 5.75x (less than 5x as of June 30, 2017). Manageable Other Liabilities: Transocean maintains several defined benefit pension plans, both funded and unfunded, in the U.S. and abroad. As of Dec. 31, 2016, the company's funded status was negative $351 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 newbuild purchase commitments and service agreement obligations totaling approximately $1.5 billion on a multi-year, undiscounted basis as of Dec. 31, 2016, adjusting for the transfer of jackup obligations. The vast majority of the post-2017 newbuild purchase obligations are associated with the current 2020 delivery of the uncontracted UDW rigs, which the industry has demonstrated an ability to defer. FULL LIST OF RATING ACTIONS Fitch has assigned the following rating: Transocean Inc. --Senior unsecured guaranteed notes at 'BB/RR2'. Fitch currently rates Transocean as follows: Transocean Ltd. --Long-Term IDR 'B+'. Transocean Inc. --Long-Term IDR 'B+'; --Senior unsecured guaranteed notes 'BB/RR2'; --Senior unsecured notes/debentures 'B/RR5'; --Senior unsecured bank facility 'B/RR5'; --Senior unsecured convertible bond 'B(EXP)/RR5'. Global Santa Fe Inc. --Long-Term IDR 'B+'; --Senior unsecured notes 'B/RR5'. Transocean Phoenix 2 Limited --Long-Term IDR 'B+'; --Senior secured notes 'BB-/RR3'. Transocean Proteus Limited --Long-Term IDR 'B+'; --Senior secured notes 'BB-/RR3'. The Rating Outlook is Negative. Contact: Primary Analyst Dino Kritikos Senior Director +1-312-368-3150 Fitch Ratings, Inc. 70 W Madison St Chicago, IL 60602 Secondary Analyst Joan Isi Okogun Senior Director +1-212-908-0384 Committee Chairperson Michael Paladino, CFA Managing Director +1-212-908-9113 Date of Relevant Rating Committee: Aug. 16, 2017 Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings. . Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below