Fitch Rates OODF's 2014-1 Notes 'BBB'; Outlook Stable
CHICAGO -- February 26, 2014
Fitch Ratings assigns the following rating to the proposed issuance of
additional notes by Odebrecht Offshore Drilling Finance Ltd. (OODF), a
multi-issuance company setup in the Cayman Islands:
--US$580 million series 2014-1 6.625% senior secured notes: 'BBB'; Outlook
Fitch's rating on the 2014-1 senior secured notes addresses 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 US$2.24 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.
With the closing of the series 2014-1 notes, the program now benefits 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 are
pari passu and share all the collateral, cash flow from the four assets will
be allocated on a pro-rata basis among both series. 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)) jointly
and severally guarantee the payment and performance of both series.
The program is 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.
KEY RATING DRIVERS
The 'BBB'/Outlook Stable rating for the series 2014-1 notes reflects the
following key drivers:
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 exposing the cash flows
to this risk.
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.
Exposure to Operator/Sponsor Risk: OOGs credit quality as operator of the four
vessels backing the transaction is considered, as the contracts have
termination clauses related to the bankruptcy of the operator/sponsor and its
financial position might constrain its ability to operate the vessels through
the life of the transaction. Fitch believes contemplated leverage levels
mitigate the transaction's exposure to bankruptcy of the operator.
Additionally, OOG's experience and the performance of its fleet support
Fitch's forward looking uptime and opex assumptions.
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 1.26 times (x) 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 reserves, rechartering and balloon payment reserve amounts is 19.32%, using
Fitch's valuation approach. These metrics are in line with a 'BBB' category
rating according to Fitch's 'Criteria for Rating Oil-Vessel Backed Financing
in Latin America'.
Additional drivers include (i) Diversified nature of the portfolio; (ii)
Liquidity and Overall Structural Features providing a window of over 12-months
for foreclosure and sale of assets in case of cancellation of the charter and
services agreements (iii) the guarantees in place which allow foreclosure and
sale of the assets in case of technical events of default; and (iv) the
already operational nature of the rigs and consequent non-exposure to
construction, delivery, or acceptance risks.
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 can be found in Fitch's
presale report titled 'Odebrecht Offshore Drilling Finance Ltd. Series 2014-
1' available 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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