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Rating Action:

Moody's assigns first time Baa3 rating to the Lancer Finance Company (SPV) Limited

20 Sep 2010

Notes payment is backed by revenues from the charter and operating services contracts with Pertobras

New York, September 20, 2010 -- Moody's Investors Service has assigned a first time Baa3 rating and a stable outlook to the Lancer Finance Company (SPV) Limited, Series 2010 Notes due 2016 to be issued in the amount of U.S. $275 million. The Notes are being issued under Rule 144A under the Securities Act and will be sold in the US and in Brazil. The notes are being issued by Lancer Finance Company (SPV) Limited (the Issuer), a newly formed special purpose vehicle incorporated in the British Virgin Islands. The debt is secured by revenues received by the issuer under seven-year charter and operating services agreements between Petroleos de Brazil S.A. ("Petrobras") and Turasoria S.A. L.L.C for the use of the S.C. Lancer drilling vessel. Proceeds of the notes will be used to repay outstanding bank debt, all issuance related costs and to partially fund the purchase of two new drilling vessels currently under construction which are due to be delivered to Petrobras in the next two years.

RATINGS RATIONALE

The Baa3 rating reflects reliance for the payment of debt service on a highly stable and predictable revenue source from Petrobras (rated Baa1, positive outlook), the issuer's long-standing relationship with Petrobras in this same line of business, the proven track record of the S.C. Lancer operations during this time, and debt service coverage ratio (DSCR) at comfortable levels for the assigned rating. Additionally, the structure provides relatively strong lender protections including cash trapping and disposition of the collateral in the event of various degrees of stress in the project.

The basis for the project is the charter agreement for the use of the S.C. Lancer drilling vessel between Petrobras S.A. and Turasoria S..A., L.L.C. ( "the Lessor") . Under the agreement, Petrobras pays the a daily rate as long as the vessel is available to operate, the payments of which are made directly to West LB as Collateral Agent, which in turn transfers it to Deutsche Bank, as Indenture Trustee for direct payment to note holders. The Indenture Trustee will pay scheduled interest and target principal until the expected repayment of the notes in June 2016. The legal maturity date of the notes is expected to be set for December 2016.

The S.C. Lancer is a dynamically positioned (DP) drilling vessel able to drill in mid-depth waters. The vessel has been under a charter agreement with Petrobras since 1992, and the current fourth extension of the agreement expires in August 2016. Historically, the S.C. Lancer has performed well by industry standards, with a average utilization rate of 96.1% over the last 10 years.

The vessel is owned by Turasoria S.A., a Panamanian corporate, and sails under the flag of Panama. Turasoria S.A. charters the S.C. Lancer to The L.L.C. (a Delaware Corporation) for the purposes of the latter being the party to the Petrobras agreement. Schahin Engenharia, a subsidiary of Schahin Holdings, holds the operating service agreement with Petrobras and is the operator of the S.C. Lancer. Under a separate Operating Services Agreement with Petrobras, Schahin Engenharia receives a daily rate for operating expenditures. These revenues are also pledged to the notes being rated herein. The daily rate paid under the Operating Services Agreement covers only about 40% of the total operating costs of Schahin Engenharia for the S.C. Lancer. The remainder will be met by the cash that is returned to the Lessor at the bottom of the revenue waterfall, which under management's base case and several stress scenarios is more than sufficient to cover the net amount of operating expenditures. Full coverage of operating expenses is ultimately the responsibility of Schahin Engenharia.

The current useful life of the vessel is calculated to be 11.5 years, with the assumption that the customary maintenance and dry docking schedule be respected. The current fair market value of the vessel, without the benefit of the charter agreement, is estimated at $224 million and the full market value at the end of the charter agreement is estimated at $134 million. These values are key in the event that bondholders were to act on the security package for the notes.

The vessel is fully insured for total loss and business interruption insurance at an amount of $565 million, which more than adequately covers the notes in the event of loss of the vessel. On the other hand, in the event of an accident, the Petrobras Charter Agreement provides for a limit on environmental liability of $500,000 per incident to the Lessor and/or Schahin.

Petrobras has the option to terminate the charter agreement under certain circumstances including a bankruptcy of Turasoria S.A., L.L.C. Concerns regarding the probability that Turasoria S.A., L.L.C. could be pulled into a bankruptcy proceeding of the Schahin Group companies are mitigated in part by the security interest in the shares of the Turasoria companies as a part of the collateral package, and in a very important way by the consideration that pulling the L.L.C. into bankruptcy would not be to the benefit of shareholders of Schahin, given that the termination of the charter agreement would end what is the relatively large cash flow represented by the revenues of the S.C. Lancer Operations. Further protection to bondholders is offered by the Share Pledge Agreement that allows the trustee an irrevocable voting proxy to the shares of capital stock of the Owner and the membership interests of the Issuer with respect to any matters relating to the bankruptcy, insolvency, reorganization, or other similar proceeding of either company.

Under management's base case, the indenture debt service coverage ratio (DSCR), is 1.43x on average from 2011 and 2015. The notes' indenture DSCR is defined as net charter revenues (charter revenues minus charter expenses divided by scheduled interest and target principal payments). Additionally, Moody's calculates a consolidated net revenue DSCR, which considers the operating revenues under the Operating Services Agreement as well as the related operating expenses of the operator, in light that the operating expenses have to be fully covered for the vessel to be operating and available. The average consolidated net revenue DSCR between 2011 and 2015 is 1.17x, which indicates that the project is able to cover charter and operating expenses with a moderate margin which allows for it to pay scheduled interest and targeted principal under a series of stress scenarios that incorporate increased down time, higher than anticipated dry docking expenses, and a more rapid rise in operating expenditures.

The structure allows for events which trigger the change of operator, including non-payment of other debt or a bankruptcy filing of the operator. In the event that the operator is replaced, the incumbent operator must remain in place until the new operator takes over the operations, thus ensuring that the vessel will not be idle during this change.

The multi-asset collateral package for the senior notes provides adequate security to note holders. The waterfall is fairly typical for a project financing, with the addition of accounts that are specific to this transaction, such as the dry-dock reserve. Investor protections include trigger events in which cash can be trapped at the bottom of the waterfall under certain circumstances including a DSCR for the most recent three months is less than 1.30x.

The events of default in the transaction can result in remedies that allow note holders to secure the collateral package and sell assets in order to recoup their investment, or accelerate principal repayment by trapping cash and applying the funds to repay debt. There is no option for note holders to declare the debt be immediately due and payable.

A ratio measuring the debt of the issuer against the value of the S.C. Lancer, which provides information to investors about the ability to repay the debt by liquidating the asset if necessary, is a key to both the trigger events and those that could result in the acceleration of principal payment.

The rating is well placed in its rating category, but could experience upward pressure if significant cost containments on the part of the lessor and the operator resulted in consistently higher than anticipated debt service coverage levels.

A level of performance by the S.C. Lancer that is notably lower than expected under the base case and which affects the revenues received from Petrobras under the charter agreement would place downward pressure on the rating.

The rating was assigned by evaluating factors believed to be relevant to the credit profile of the Project such as i) the business risk and competitive position of the project versus others within its industry or sector, ii) the capital structure and financial risk of the project, iii) the projected performance of the project over the near to intermediate term, and iv) the project's history of achieving consistent operating performance and meeting budget or financial plan goals. These attributes were compared against other projects believed to be comparable and to ratings assigned to other projects of similar credit risk.

For detailed information please see "Lancer Finance Company (SPV) Limited Pre-Sale Report" published on September 20, 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Laura Barrientos
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Chee Mee Hu
MD - Project Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

Moody's assigns first time Baa3 rating to the Lancer Finance Company (SPV) Limited
No Related Data.
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