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Rating Action:

Moody's affirms Seadrill Partners' existing ratings (CFR at Ba3) and revises outlook to negative

12 Mar 2015

London, 12 March 2015 -- Moody's Investors Service, ("Moody's") today affirmed Seadrill Partners LLC's (SDLP) corporate family rating (CFR) at Ba3, probability of default rating (PDR) at Ba3-PD, the Ba3 rating on the $2.9 billion senior secured term loan due 2021, borrowed by Seadrill Operating LP and Seadrill Partners Finco LLC, subsidiaries of SDLP and the Baa3 rating on the $100 million first out secured revolving credit facility (RCF) due 2019, borrowed by Seadrill Operating LP, Seadrill Partners Finco LLC, and Seadrill Capricorn Holdings LLC, also a subsidiary of SDLP. The outlook on all ratings is revised to negative from stable.

"We revised Seadrill Partners LLC's outlook to negative to reflect increased risk from the cross default with its parent, Seadrill Limited (SDRL unrated), which we expect is at risk of breaching covenants this year and which has a substantial funding requirement of over $3 billion next year if it is unable to significantly delay deliveries of its newbuild vessels currently under construction", said Douglas Crawford, Vice President and lead analyst for Seadrill Partners. "We view SDRL's $11.6 billion contract backlog and industry leading, young fleet as favourable factors, but remain concerned that the weak offshore drilling environment increases the risk for Seadrill Limited to obtain financing for its extensive newbuild programme or to reset its covenants."

RATINGS RATIONALE

The affirmation of Moody's existing ratings reflects: (1) the strong $5.6 billion contract backlog, with approximately 3.3 years on average remaining on the contracts and all collateral rigs contracted out until 2017, (2) the high quality fleet of rigs and tender barges with an average age of 3.7 years, (3) the vast majority of customers being highly rated investment grade companies such as Chevron Corporation (Aa1 stable) and BP p.l.c. (A2 negative), and (4) the lack of construction risk at SDLP, as vessels are only dropped down from SDRL once they have been operating on contract and SDRL's large and very young fleet provides access to numerous drop-down candidates.

These positives are countered by the: (1) relatively high consolidated leverage that Moody's expects at approximately 4.0x at the end of 2015 and the inherent volatility of the offshore drilling market, (2) high degree of structural complexity and the shareholder friendly nature of the MLP/LLC structure, (3) credit and management linkages with the much larger but aggressively managed, unrated parent SDRL, including cross-defaults and cross-acceleration with the rated term loan, and (4) concern over transition risk due to changes in senior management.

SDLP's acquisition of the West Vela ultra-deepwater drillship from SDRL, in November 2014, added a newly constructed drillship with one of the longer contracts in the industry without worsening 2015 debt/EBITDA, according to Moody's estimates. However, the decision to keep the $433 million of debt outstanding under the existing facility financing the drillship added to debt financing the West Vencedor and the undrawn $100 million RCF from SDRL that has cross defaults, cross acceleration with and maintenance covenants on SDRL.

Moody's expects SDRL to be fully funded for 2015 assuming that the new $750 million facility is signed shortly. Whilst the weak industry backdrop introduces challenges for SDRL to renegotiate covenants, receive additional bank funding and/or negotiate newbuild delivery delays for its seven floaters and eight jack-ups with the shipyards, the current rating assumes that these issues can be addressed due to SDRL's industry leading fleet and strong contract coverage. Moody's believes that SDRL also has other potential, although limited, sources of liquidity such as asset sales or equity issuance.

Rating Outlook

The negative outlook reflects the negative pressure from the credit linkage with Seadrill Limited, which Moody's expects is at risk of breaching covenants this year and which has a substantial funding requirement of over $3 billion next year if it is unable to significantly delay deliveries of its newbuild vessels currently under construction.

WHAT COULD CHANGE THE RATING UP/DOWN

The rating could be downgraded if consolidated leverage is sustained around 4.5x, the collateral group leverage remains above 4.0x, or if Moody's concerns around covenant headroom and funding requirements at Seadrill Limited are not addressed. Conversely, the outlook could be stabilised if the credit concerns at Seadrill Limited are resolved and the fleet operates at high levels of utilisation, and the rating could then be upgraded if consolidated leverage is maintained below 3.5x, the collateral group leverage is maintained below 3.0x and the fleet at the borrowing group level grows materially.

The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in December 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Seadrill Partners LLC, is a Marshall Islands registered company, fully controlled by Seadrill Limited. 47% of SDLP LLC's interest is owned by SDRL, with the remainder held by public unitholders. It is a provider of offshore drilling services to the oil and gas industry and its fleet consists of four 6th generation ultra-deepwater semi-submersibles and three ultra-deepwater drillships, two tender barges and one semi-tender barge. It generated revenue and Moody's adjusted EBITDA of $1,064 million and $682 million respectively in FY2013 and has a current market capitalisation of approximately $1.4 billion. Seadrill Limited, which has an operating agreement with SDLP, has a fleet of 59 units, including 15 under construction. For FY2013, it reported revenues of $5.85 billion and Moody's adjusted EBITDA of $3 billion. It has a current market capitalisation of approximately $5 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Douglas Crawford
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Seadrill Partners' existing ratings (CFR at Ba3) and revises outlook to negative
No Related Data.
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