S&P: Drilling Company Ocean Rig UDW Downgraded To 'CCC-' On Delivery Delays And Potential Debt Restructure; Outlook Negative
At the same time, we lowered our issue ratings on:Drillships Ocean Ventures Inc.'s $1.3 billion term loan B facility to 'CCC-' from 'CCC+'. The '3' recovery rating reflects recovery expectations in the higher half of the 50%-70% range. Drill Rigs Holdings Inc.'s $800 million senior secured notes to 'CCC-' from 'CCC+'. The '3' recovery rating is unchanged, with recovery expectations in the lower half of the 50%-70% range. Drillships Financing Holding Inc.'s $1.9 billion term loan B1 facility to 'CCC-' from 'CCC+'. The '3' recovery rating reflects recovery expectations in the higher half of the 50%-70% range. Ocean Rig's $500 million senior unsecured notes due in 2019 to 'CC' from 'CCC-'. The '6' recovery rating is unchanged. The downgrade follows the company's intention to pursue changes in the current capital structure. According to management, the very weak demand for drilling rigs and the current net debt position (as of June 30, 2016 the reported net debt was $3.2 billion), rendered the capital structure unsustainable. We understand that some of the alternatives to reduce the overall debt level include reorganization under U. S. bankruptcy laws.
Under our criteria, we view a distressed exchange offer as tantamount to default, which will ultimately lead us to lower the rating on Ocean Rig to 'SD' (selective default). This would be the case if lenders received less than the original value of the loan--for example, if the tenor were extended without appropriate compensation (maybe through an amendment fee or an adequate interest rate increase), or if the interest or principal were reduced.
We understand that the company has started the discussions with debt holders. As a result, we view a high probability of us lowering the rating to 'SD' in the coming quarters.
On the back of the liability management exercise, Ocean Rig recently concluded an agreement with Korean shipyard, Samsung Heavy Industry. Under this agreement, the delivery of the two new drilling rigs (Ocean Rig Santorini and Ocean Rig Crete) will be delayed to June 2018 and January 2019 in return for an immediate payment of about $200 million. As part of the agreement, the parent company will not guarantee future payments, and effectively the delivery of the two drilling rigs would be subject to future market conditions. After the agreement, the company's maintenance will drop to $20 million-$30 million in the coming 12 months, allowing it to generate positive free operating cash flows. In our view, the agreement should allow Ocean Rig to meet all its financial obligations in the coming 12 months, supporting our current less-than-adequate liquidity assessment.
We have also revised our management and government assessment to weak, reflecting a number of opportunistic transactions that diluted Ocean Rig's cash balance over the last few quarters (including acquiring a rig for $65 million and the buy back of notes maturing in 2019).
The negative outlook reflects the risk of Ocean Rig defaulting in the coming months, if it reaches an agreement with its lenders to restructure its debt or filed for Chapter 11. We understand that negotiations with some debt holders are undergoing.
Moreover, over the long-term, we could also consider the company to have defaulted if it breaches its financial covenants, resulting in an acceleration of the debt, or if the company does not secure new contracts while need to meeting its $530 million maturity in the second half of 2017.
We would likely lower the ratings to 'SD' if Ocean Rig reached an agreement with the lending banks, resulting in a distressed exchange offer.
After the completion of such an exchange, we would raise the rating on Ocean Rig, taking into account the improved liquidity and more comfortable debt maturity.
We could take a positive rating action if the outlook for the drilling sector improved and the company decided to cease the discussions over its capital structure. In our view, this scenario should be supported by an improvement in the liquidity position, including sufficient headroom under the covenants to absorb shocks in the market.