OREANDA-NEWS. Fitch Ratings has downgraded Weatherford International plc (Weatherford; NYSE: WFT) and its subsidiaries Long-Term Issuer Default Ratings (IDR) and senior unsecured ratings to 'B+' from 'BB'. Fitch has also assigned the secured term loan a rating of 'BB+/RR1', affirmed the amended unsecured bank facility rating at 'BB' and revised its Recovery Rating to 'RR2' from 'RR4'. The Rating Outlook remains Negative.

The downgrade reflects the lower than previously expected E&P capital spending in 2016 and Fitch's lower and longer services recovery profile assumption. This is forecast to further challenge Weatherford's operating results and free cash flow (FCF) profile resulting in metrics remaining above Fitch's through-the-cycle levels for a 'BB' category credit over the rating horizon.

The Negative Outlook considers the potential that persistently low oil & gas prices could extend the oilfield services down cycle beyond Fitch's current expectations and further heighten Weatherford's refinance risk. Fitch currently forecasts that FCF will be relatively modest and asset sale prospects challenged over the next few years.

Fitch understands that, under its amended incurrence covenants, the company has the ability to issue additional unsecured guaranteed debt, subject to the greater of $750 million or a 2.5x pro forma specified senior debt-to-EBITDA ratio limitation (Fitch estimated capacity of approximately $1.4 billion as of March 31, 2016) prior to Dec. 31, 2016. Thereafter, the additional unsecured guaranteed debt incurrence limitation will only be subject to the 2.5x pro forma specified senior debt-to-EBITDA ratio. Fitch recognizes that this debt incurrence capacity, in conjunction with credit facility availability, helps to alleviate near-term liquidity and refinance risks. However, the forecasted need for additional non-operating cash flows over the rating horizon could limit the company's ability to meaningfully address its capital structure. Any potential unsecured guaranteed debt issuances may reduce the recovery prospects for the senior unsecured notes, possibly leading to further negative rating actions.

The senior unsecured guaranteed bank facility Recovery Rating was upgraded to 'RR2' from 'RR4' reflecting the structurally senior priority of the revolving credit facility following the amendment that introduces guarantees by substantially all material HoldCos and all material OpCos in certain jurisdictions that directly or indirectly represent approximately 100% of EBITDA.

Approximately $7 billion of debt, excluding short-term borrowings, is affected by today's rating action. A full list of ratings actions follows at the end of this release.

KEY RATING DRIVERS
Weatherford's ratings consider its position as the fourth largest international oil & gas services company, geographic diversification (North America [NA] has historically contributed 45%-50% of consolidated revenues), returns-focused strategic initiatives, and projected FCF profile leading to moderate further debt reduction over the rating horizon. These considerations are offset by the company's mixed asset quality and weaker than forecast through-the-cycle leverage metrics.

MODESTLY POSITIVE 2016 FCF, ELEVATED METRICS FORECAST
Fitch's rating case projects that Weatherford will be approximately $200 million FCF positive in 2016. This FCF estimate considers a Zubair settlement, full year of operating cost savings, maintenance capex levels, additional activity-linked working capital improvements, and further reductions in oilfield services demand. Fitch expects the company to allocate all anticipated surplus FCF towards debt repayment over the rating horizon.

Debt/EBITDA metrics are currently forecast to increase further in 2016 to approximately 13.4x, including an assumed $750 million unsecured guaranteed debt issuance (12.1x excluding the issuance). Fitch assumes the unsecured guaranteed debt issuance is largely used for the repayment of the unsecured notes at maturity and the gross debt addition is temporary. Thereafter, Fitch's rating case forecasts that the leverage profile will exhibit moderate levels of oil & gas price-driven improvements leading to debt/EBITDA in the 5.5x-6.0x range by 2018.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Weatherford include:
--WTI oil price that trends up from $35/barrel in 2016 to a long-term price of $65/barrel;
--Henry Hub gas that trends up from $2.25/mcf in 2016 to a long-term price of $3.25/mcf;
--Consolidated revenue decline of over 35% in 2016 with greater declines in NA relative to international regions on average due to further global E&P capital spending reductions with a moderate recovery thereafter;
--Margins that exhibit a full year of cost improvements in 2016 with some moderate additional cost reductions assumed thereafter;
--Capital expenditures of $250 million in 2016 followed by similarly low levels of capex until operating cash flows exhibit meaningful growth;
--Year-over-year cash flow improvements related to Zubair contractual and severance costs;
--Assumed an incremental $750 million in unsecured guarantee-enhanced debt issued during 2016 with proceeds largely used to repay maturities;
--Application of surplus cash to debt repayment;
--Retention of international rig fleet.

RATING SENSITIVITIES
Positive: No positive rating actions are currently contemplated over the near term given the continued weakness in the oilfield services outlook and Fitch's projections for leverage that exceeds through-the-cycle levels. However, future developments that may, individually or collectively, lead to a positive rating action include:

For an upgrade to 'BB-':
--Demonstrated commitment by management to lower gross debt levels;
--Track record by management of achieving operational and financial targets;
--Mid-cycle debt/EBITDA below 5.0x on a sustained basis.

To resolve the Negative Outlook at 'B+':
--Demonstrated ability to effectively manage forecasted liquidity and refinance risks;
--Improved oilfield services outlook supported by pricing and/or activity level improvements;
--Mid-cycle debt/EBITDA of 5.0x-5.5x on a sustained basis.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Failure to manage FCF and/or capital market funding issues that further heighten liquidity and refinancing risks;
--Further material, sustained declines in oilfield services demand;
--Mid-cycle debt/EBITDA around 6.0x on a sustained basis.

BANK TRANSACTION HELPS ALLEVIATE NEAR-TERM LIQUIDITY CONCERNS
Weatherford had cash and equivalents of $464 million, as of March 31, 2016. The majority of cash has historically been held by foreign subsidiaries with $139 million denominated in exchange-restricted Angolan kwanza. Supplemental liquidity is principally provided by the company's recently amended $1.15 billion unsecured guaranteed credit facility due July 2019, which is subject to periodic reductions to a minimum commitment of $1 billion. Fitch notes, however, that the company will have access to an additional $229 million in non-extending bank credit facility commitments until July 2017. The credit facility had a pro forma balance of approximately $535 million, considering the $500 million term loan, as of March 31, 2016.

MATURITY PROFILE
Over the next five years, Weatherford has $600 million in 6.35% senior notes due June 2017, $500 million in 6% senior notes due in March 2018, $1 billion in 9.625% senior notes due March 2019, and $773 million in 5.125% senior notes due September 2020. The recently issued $500 million secured term loan is due July 2020, subject to quarterly amortization payments of $12.5 million beginning Sept. 30, 2016. The amended credit facility is subject to a Nov. 28, 2018 springing maturity if 50% of the $1 billion notes due March 2019 are not redeemed, repurchased, refinanced, or otherwise retired.

Management has indicated that they expect to meet the upcoming maturities with a combination of cash on hand, FCF, potential land rig sale proceeds (management estimate of $500 million to $1 billion), and debt proceeds. However, Fitch currently forecasts that the company will largely need to use the credit facility and/or raise additional capital market proceeds to repay scheduled unsecured notes maturities and meet the amended credit facility's springing maturity provision.

MODIFIED COVENANT PACKAGE
The company's main financial covenants, as defined in the term loan and credit agreement, are a maximum Specified senior debt-to-EBITDA ratio of 3x (1.1x as of March 31, 2016; steps down to 2.5x in 2017), maximum Specified senior debt and letter of credit-to-EBITDA ratio of 4x (1.7x as of March 31, 2016; steps down to 3.5x in 2017), and minimum asset coverage ratio of 4x (14x as of March 31, 2016). Fitch highlights that the covenant package also allows for additional unsecured guaranteed debt, subject to the greater of $750 million or a 2.5x pro forma Specified senior debt-to-EBITDA ratio limitation (Fitch estimated capacity of approximately $1.4 billion as of March 31, 2016) prior to Dec. 31, 2016. Thereafter, the additional unsecured guaranteed debt incurrence limitation will only be subject to the 2.5x pro forma Specified senior debt-to-EBITDA ratio. Specified senior debt, as per the covenants, represents the secured term loan and unsecured debt enhanced by a guarantee. Other customary covenants contained in the indentures governing the senior unsecured notes restrict the ability to incur additional liens, engage in sale and leaseback transactions, and merge, consolidate, or sell assets, as well as change in control provisions.

SECURITY AND GUARANTEES
The term loan security package is a first lien on Weatherford International Ltd. (Weatherford Bermuda) with guarantees from the parent and Weatherford International, LLC (Weatherford Delaware), as well as guarantees from WOFS International Finance GmbH (Swiss) and Weatherford Worldwide Holdings GmbH, among others. The amended unsecured guaranteed credit facility is guaranteed by substantially all material HoldCos and all material OpCos in certain jurisdictions that directly or indirectly represent approximately 100% of EBITDA. Guarantees have also been provided by and between Weatherford Bermuda and Weatherford Delaware for all senior unsecured notes, effectively making the notes pari-passu and establishing cross-guarantees. Additionally, Weatherford International plc has guaranteed all obligations of its affiliates.

Fitch believes that the term loan's first-lien security gives it priority over the unsecured guaranteed credit facility and senior unsecured notes. Further, Fitch views the guarantees provided by the material HoldCos and OpCos structurally subordinate the senior unsecured notes.

OTHER CONTINGENT LIABILITIES
Weatherford's pension obligations were underfunded by $124 million for the year ended 2015. Fitch believes that pension funding requirements are manageable relative to mid-cycle funds from operations and pension contributions. The company had nearly $1.6 billion in other contingent obligations on a multi-year, undiscounted basis as of Dec. 31, 2015. These obligations consisted of non-cancellable operating lease payments ($1.2 billion) and purchase obligations ($383 million).

FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:

Weatherford International plc
--Long-term IDR downgraded to 'B+' from 'BB'.

Weatherford International Ltd. (Bermuda)
--Long-term IDR downgraded to 'B+' from 'BB'';
--Senior secured term loan A rated 'BB+/RR1';
--Senior unsecured guaranteed bank facility affirmed at 'BB' with the recovery rating revised to 'RR2' from 'RR4';
--Senior unsecured notes downgraded to 'B+/RR4' from 'BB/RR4';
--Short-term IDR affirmed at 'B';
--Commercial paper program affirmed at 'B'.

Weatherford International, LLC (Delaware)
--Long-term IDR downgraded to 'B+' from 'BB';
--Senior unsecured notes downgraded to 'B+/RR4' from 'BB/RR4'.

The Rating Outlook remains Negative.