Fitch Expects to Rate OODF's 2014-1 Notes 'BBB(EXP)'; Outlook Stable
CHICAGO -- February 12, 2014
Fitch Ratings expects to assign the following rating to the proposed issuance
of additional notes by Odebrecht Offshore Drilling Finance Ltd. (OODF, the
Issuer), a multi issuance company setup in the Cayman Islands (Cayman):
--Up to USD580 million series 2014-1 senior secured notes: 'BBB(EXP)'; Outlook
Additionally, Fitch Ratings has affirmed the rating assigned to the 2013-1
notes issued by OODF as follows:
--USD1,690 million senior secured notes series 2013-1 at 'BBB'; Outlook
Fitch's ratings address the likelihood of timely payment of interest on a
quarterly basis and payment of principal considering the potential for two
quarterly principal payment deferrals. The outstanding balance of the program,
including series 2013-1 and 2014-1 notes, as of the date of the second funding
is expected to be US$2.2 billion. The first debt service payment for the
combined transaction is scheduled for June 1, 2014. Expected maturity date for
both series is October 2022.
At closing of the series 2014-1 notes, the program will benefit from an
additional collateral package, including a naval mortgage on the ultra
deepwater (UDW) semi-submersible rig ODN Tay IV and a pledge of the shares of
ODN Tay IV GmbH (owner of the rig Tay IV). Series 2013-1 and 2014-1 notes will
be pari passu and share all the collateral. The original Guarantors (ODN I
GmbH (owner of ODN I and ODN II) and ODN Six GmbH (owner of Norbe VI)) and the
Additional Guarantor (ODN Tay IV GmbH (owner of ODN Tay IV)) will jointly and
severally guarantee the payment and performance of both series.
The program will be 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 called 'ODN I' and 'ODN II' for the term
of 10 years and the UDW semi-submersibles called Norbe VI and ODN Tay IV, for
the term of seven years. Odebrecht Oleo e Gas S.A. (OOG), oil and gas arm of
Brazilian-based Odebrecht Group (Odebrecht), is the operator of the drilling
rigs and primary sponsor of the transaction. The proceeds of the issuance of
series 2014-1 notes will be mainly used to refinance the existing loan
attached to ODN Tay IV GmbH.
This expected rating does not incorporate Fitch's full legal analysis as this
process is currently ongoing and the final rating is contingent upon the
receipt of final documents conforming to information already received.
KEY RATING DRIVERS
The 'BBB(EXP)'/Outlook Stable expected rating for series 2014-1 notes and the
'BBB'/Outlook Stable rating for series 2013-1 notes reflect the following key
Credit Quality of the Offtaker: Petrobras' rating is the implied cap for
drilling rig transactions in which it acts as offtaker as it is the main
source of cash flow generation. Petrobras carries local and foreign currency
issuer default ratings (IDR) of 'BBB.' The company is controlled by the
federal government of Brazil and has the rights to exploration and production
(E&P) of the vast majority of Brazil's oil fields.
Conditionality and Revocability of the Charter Agreement: The services and
charter agreements backing this transaction are joint and several and
revocable under specific events. Extended periods of downtime or bankruptcy of
the operator allow for cancellation of the agreements adding potential
volatility to the cash flows.
Rechartering Risk: The existing charter and services agreements, for both
Norbe VI and ODN Tay IV, expire before the maturity of the notes. This
exposure is mitigated by: (i) current market day rate levels significantly
above the current contract's day rate; (ii) market forecasts on the supply and
demand fundamentals for UDW rigs; (iii) the Petrobras E&P plans and the
challenges to delivery of the 28 drilling rigs scheduled for 2016-2020; and
(iv) the liquidity mechanisms embedded in the transaction.
Credit quality of the operator: The operator's credit quality is considered,
as the contracts have termination clauses related to the bankruptcy of the
operator/sponsor and the operator's financial position might constrain its
ability to operate the vessel through the life of the transaction. OOG is the
largest Brazilian operator of UDW rigs chartered to Petrobras, with seven
operating UDW rigs in its fleet, Fitch believes this mitigates the
transaction's exposure to bankruptcy of the operator.
Positive Supply and Demand Fundamentals: The Federal Government of Brazil and
Petrobras have passed several initiatives seeking the development of the local
oil and gas industry. UDW rigs are essential assets for continued research and
development of new oil fields in Brazil. Investments by Petrobras and
regulation/legislation imposed by the government should continue to provide a
stable credit environment for sponsors and protect value of these assets.
Adequate Leverage and Refinance Risk: Fitch's adjusted valuation of the rigs
indicates an initial loan to value (LTV) at the moment of the second issuance
of 68.19% and a net LTV of approximately 64.64%. Debt service coverage ratios
(DSCR) are expected to average 1.26x under Fitch's base case scenario. In
order to mitigate refinancing risk, a dividend retention mechanism will begin
46 months prior to the expected maturity date. LTVs net of liquidity,
rechartering and balloon payment reserve amounts is 19.32%, using Fitch's
valuation approach. These metrics are in line with an investment grade rating
according to Fitch's 'Criteria for Rating Oil-Vessel Backed Financing in Latin
Diversified Portfolio: The multiple-asset nature of this transaction provides
additional protection should a temporary problem occur with one vessel, as the
other ones can continue generating cash flows to honor timely debt service
payments. Additionally, this transaction incorporates mitigation mechanisms,
including additional liquidity, and business-interruption insurance to
mitigate the exposure to a single asset.
Guarantees in Place: The transaction benefits from a pledge of the shares of
the companies that own the rigs and from mortgages on the individual rigs.
Under certain events, the transaction may seize and dispose of the vessels to
repay the outstanding balance of the notes. The transaction structure also
allows for the substitution of OOG as operator of the vessel.
The ratings are sensitive to changes in the credit quality of Petrobras, as
offtaker to the charter and services agreements. The foreign currency (FC) IDR
assigned to Petrobras acts as the implied cap to drilling rig transactions in
which it acts as offtaker. In addition, the expected rating is sensitive to
the operating performance of the rigs. Extended periods of downtime, which
lead to the revision of Fitch's expected uptime assumption of 95%, would
result in lower debt service coverage ratio (DSCR) expectations and
potentially result in rating downgrades.
A detailed description of the criteria application will be provided in Fitch's
presale report titled Odebrecht Offshore Drilling Finance Ltd. Series 2014- 1'
available shortly at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
The information and documentation used to assess the rating was provided by
Odebrecht Oleo e Gas S.A., IHS Inc., ABSG Consulting Inc., GL Noble Denton and
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (June 19, 2013).
--'Criteria for Rating Oil Vessel 'Backed Financing in Latin America' (Jan.
--'Odebrecht Offshore Drilling Finance Ltd.- Senior Debt, Series 2013-1' (Aug.
Applicable Criteria and Related Research:
Odebrecht Offshore Drilling Finance Ltd.
Global Structured Finance Rating Criteria
Criteria for Rating Oil Vessel-Backed Financing in Latin America
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