OREANDA-NEWS. Fitch Ratings has downgraded Schahin Oil and Gas Ltd.'s (Schahin, or HoldCo) foreign and local currency Issuer Default Ratings (IDRs) to 'C' from 'B-' and removed the Rating Watch Negative.

KEY RATING DRIVERS

The downgrade follows the continuing deterioration of Schahin's credit quality and its exposure to current depressed market conditions. HoldCo has not succeeded in refinancing its short-term debt, which further pressured its already tight liquidity position. Allegations that the engineering unit of the Schahin Group, Schahin Engenharia, would be involved in the Lava-Jato investigation contribute to aggravating the situation. Petrobras' announcement on April 2, 2015, that Schahin would temporarily suspend the operations of five out of its six vessels indicates the company faces severe liquidity issues to run its daily operations. The suspension may affect uptime performance and could eventually lead to an early termination of the contracts.

Schahin currently has a bridge loan with Mizhuo Bank Ltd for approximately USD460 million due in October 2015. The company's refinancing risk substantially increased as a result of the decrease in international oil prices and the uncertainty created by the current investigation into Petrobras' contracting practices. A USD340 million of short-term bank debt at Deep Black Drilling LLC, an intermediate holding company, further pressures Schahin's liquidity.

KEY ASSUMPTIONS

--Credit will continue to be scarce in Brazil especially for those with names cited on the Lava-Jato investigation.

RATING SENSITIVITIES

Fact that could lead to a negative rating action is a request for bankruptcy protection.

A positive rating action is unlikely in the short and medium term. Key considerations for an upgrade in the future would be a faster deleveraging process coupled with a reduction of HoldCo's structural subordination to its operating assets.