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Rating Action:

MOODY'S DOWNGRADES TRANSOCEAN SEDCO FOREX'S RATINGS TO Baa2 AND UPGRADES R&B FALCON'S RATINGS TO Baa3

30 Jan 2001
MOODY'S DOWNGRADES TRANSOCEAN SEDCO FOREX'S RATINGS TO Baa2 AND UPGRADES R&B FALCON'S RATINGS TO Baa3 Moody's Investors Service downgraded the senior unsecured debt ratings of Transocean Sedco Forex Inc. to Baa2 from A3 and upgraded the ratings of R&B Falcon Corporation to Baa3 from Ba3 to reflect the pending merger of the two companies. The rating actions, which conclude a review initiated when the transaction was announced in August 2000, assume the merger will close as expected on January 31, 2001. Moody's also assumes the transaction will ultimately be approved by the U.K. government's Office of Fair Trading.

Transocean's Baa2 rating reflects the strategic benefits associated with the merger, including the creation of a significantly larger, more technically and geographically diversified drilling fleet that will provide the company with a leading market position in deepwater and ultradeepwater drilling. However, the Baa2 rating also considers the inherent cyclicality of the contract drilling industry and the significant debt burden of the merged entity. Moody's notes that R&B Falcon's financial obligations are more than two times as large as those of Transocean Sedco Forex.

The Baa3 rating of R&B Falcon assumes that the company will remain a separate subsidiary of Transocean and that Transocean will not guarantee or support its debt.

Ratings downgraded are Transocean Sedco Forex Inc.'s senior unsecured notes and debentures to Baa2 from A3.

Ratings upgraded are R&B Falcon Corporation's senior unsecured notes to Baa3 from Ba3 and its partially secured bank debt to Baa3 from Ba3. Also upgraded are RBF Finance Company's senior secured guaranteed notes to Baa3 from Ba3, and Cliffs Drillling's guaranteed notes to Baa3 from Ba3.

In a separate rating action, Moody's also assigned a Baa2 senior unsecured rating to Transocean's new bank facilities. Moody's notes that the bank facilities would benefit from upstream subsidiary guarantees should subsidiary debt rise above a certain threshold amount, whereas Transocean's senior unsecured bonds would not. However, in Moody's view, this difference was not sufficiently material to justify rating the company's bank debt above its bond ratings.

The combination of Transocean and R&B Falcon will create the world's largest offshore drilling contractor in terms of number of offshore rigs, floating rigs, and high-specification rigs. The merged company will have a diverse and high quality rig fleet, supported by geographic reach and considerable technological expertise in harsh environment and deepwater drilling. Existing long-term drilling contracts for midwater and deepwater rigs will help stabilize the company's earnings and cash flow during cyclical downturns.

However, Moody's believes that deepwater rigs are not entirely immune from declines in dayrates as their long-term contracts mature. Moreover, such contracts could be either amended (through a reduction in dayrate and/or contract maturity) or cancelled outright during industry downturns due to construction delays, unsatisfactory rig performance, or other reasons, even if they contain no explicit cancellation provisions. The Baa2 rating also takes into account the technological risks and operating challenges faced by rig contractors as they move into greater water depths.

Moody's anticipates that the combined entity's proforma debt to total capitalization will be approximately 31%. However, this capital structure reflects a significant amount of additional goodwill ($4.5 billion) expected to result from the merger under purchase accounting. Net of goodwill, the company's debt to capitalization rises to about 50%. Moody's believes that the combined entity's financial flexibility will be consistent with that of the Baa2 peer companies in a cyclical downturn.

Management intends to apply cash flow from operations to debt reduction following the merger. The extent to which the company will be able to repay debt in the near term will depend in part on a recovery in international rig utilization levels and dayrates, the timing of which is difficult to predict, and on the status of its newbuild program. Moody's will monitor management's progress in improving the combined entity's financial leverage. Management has established a debt to capitalization target of 20% (including goodwill), but leverage is likely to rise above this level from time to time as the company enters into long-term contracts for new drilling rigs and funds all or a portion of such newbuilds with debt.

Transocean Sedco Forex Inc. is a drilling service contractor based in Houston, Texas.

R&B Falcon Corporation is a drilling service contractor headquartered in Houston, Texas.


No Related Data.
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