Moodyâ€™s Investors Service, (Moodyâ€™s) downgraded Ocean Rig UDW Inc.â€™s (Ocean Rig) Corporate Family Rating (CFR) to Caa1 from B2, and Probability of Default Rating (PDR) to Caa1-PD from B2-PD.
Moodyâ€™s also downgraded the rating of Ocean Rigâ€™s USD500 million unsecured notes to Caa3 from Caa1, as well as the rating on the USD1.3 billion senior secured term loan B at Drillships Ocean Ventures Inc. (DOV), a subsidiary of Ocean Rig, to Caa1 from B2. Concurrently, Moodyâ€™s downgraded the rating on the USD1.9 billion senior secured term loan B1 borrowed by Drillships Financing Holding Inc. (DFHI) to Caa1 from B2 and the rating on the USD800 million secured notes issued by Drill Rigs Holdings Inc. (Drill Rigs) to Caa2 from B3, both are also subsidiaries of Ocean Rig. The outlook on all ratings is negative. This concludes the rating review that was initiated on 24 August 2015.
Todayâ€™s rating action reflects the deteriorating offshore drilling market, sharply increasing the risk that Ocean Rigâ€™s liquidity profile could become increasingly constrained over the next two years. The company needs to pay for a newbuild rig (the Ocean Rig Santorini), to be delivered in June 2017, and for which there is not yet a financing in place as well as refinance or repay the USD800 million secured notes maturing in October 2017. Whilst the company managed to issue USD200 million of equity in June 2015, Moodyâ€™s cautions that the companyâ€™s ability to access the capital markets could become constrained due to the strong negative trends in the offshore drilling industry, which will remain deeply entrenched through 2017.
Furthermore, Moodyâ€™s anticipates the companyâ€™s credit metrics will deteriorate in 2016 and 2017 as the majority of the companyâ€™s rigs will roll-off contract over the next two years. These rigs will either be stacked if no employment is found or in the best case, re-contracted at significant lower dayrates. Sustained weaknesses in crude prices and a steady supply of newbuilds will depress dayrates and create significant stress on the sector. As of 30 June 2015, the companyâ€™s Moodyâ€™s-adjusted leverage stood at 4.6x.
Although Ocean Rigâ€™s liquidity is adequate for the next 12 to 18 months, Moodyâ€™s expects liquidity pressure from the unfunded newbuild capex in 2017, refinancing risk associated with the October 2017 maturity of the secured notes and tightening covenant headroom that year.
More positively, the ratings reflect: (1) the strong USD4.3 billion contract backlog as of August 2015, with 93% and 69% of calendar days under contract in 2015 and 2016 respectively, (2) the young and technologically advanced fleet, with all drillships built within the last five years, and (3) recent industry leading operating performance with contracted operating efficiency of 98% for the first half of 2015 and improved fleet average operating expenses, resulting in trailing twelve months reported EBITDA of approximately $1 billion at June 2015.
The negative outlook reflects the weak offshore drilling environment and the uncertainty regarding the duration of this downturn, which could severely stress the companyâ€™s liquidity profile.
WHAT COULD CHANGE THE RATING UP/DOWN
The rating could be downgraded if Moodyâ€™s concerns around liquidity and refinancing risks are not addressed, the companyâ€™s fleet operational efficiency materially deteriorates or the Moodyâ€™s-adjusted leverage is sustained over 9.0x. Furthermore, heightened concerns that the company may seek to alleviate liquidity or refinancing issues by purchasing bonds at a steep discount could lead to such actions being potentially classified as a distressed exchange, albeit at this stage there is no evidence suggesting that the company has concrete plans to do so. Conversely, the rating could be upgraded if the credit concerns are resolved and the fleet operates at high levels of utilisation, and if the Moodyâ€™s-adjusted leverage is maintained below 7.0x.