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02 Jul 2010
Approximately $500 million of debt securities affected
New York, July 02, 2010 -- Moody's Investors Service changed Rowan Companies, Inc.'s
(Rowan) outlook to negative in response to its announcement that it intends
to acquire Skeie Drilling and Production ASA (SKDP). Moody's
also affirmed the company's Baa3 senior unsecured rating.
"The negative outlook reflects the significant amount of secured
debt Rowan is assuming in conjunction with its acquisition of Skeie Drilling
and Production ASA," said Moody's Vice President,
Ken Austin. "Having a large proportion of secured debt in
the capital structure places the senior unsecured notes in a disadvantaged
position and is not typical of an investment grade profile."
The $530 million of debt at SKDP that Rowan will assume is secured
with either a first or second lien on the rigs owned by SKDP. This
secured debt places the senior unsecured notes in a structurally subordinated
position and therefore, could be notched down. However,
the final financing plans for this acquisition have not been finalized,
and management has stated that it fully intends to refinance that debt
as soon as possible. If this assumed debt is either refinanced
with senior unsecured debt or repaid in a reasonable timeframe then notching
of the senior notes could be avoided.
Furthermore, this transaction adds to Rowan's leverage as
the rigs it is acquiring do not have contracts. Pro forma for the
acquisition of 100% of SKDP, Rowan would assume $530
million of debt. This added debt, without the benefit of
firm contracts will push Rowan's adjusted leverage to approximately
2.6x, which is on the higher end for the rating. While
this class of rig is capable of drilling in harsh environments and can
support deep drilling programs, the ability to obtain long-term
contracts at supportive dayrates is important to improving the leverage
trend and returning the outlook to stable.
On July 1,2010, Rowan announced that it has entered into share
purchase agreement with certain shareholders of SKDP to purchase their
shares in the company. The sellers that have agreed to sell their
shares to Rowan collectively own 48.8% of the outstanding
shares and Rowan had previously acquired 1.5% of SKDP's
shares, bringing its pro forma ownership to 50.3%.
Rowan will issue shares of its stock to acquire the SKDP stock and will
assume $530 million of secured debt. SKDP owns and manages
the construction of three high specification jack-up rigs,
designated "N-class", designed and being built
by Keppel FELS Ltd in Singapore. Rowan also expects the three rigs
will require an additional $420 million for completion, which
it expects to fund out of cash and cash flow.
More specifically, the move back to a stable outlook would require
a cleaner capital structure with much less secured debt, putting
the senior unsecured notes in a much improved position in the capital
structure. The company also needs to contract at least two of the
acquired rigs under long-term contracts that would provide visible
earnings and cashflows that offset the added debt and leverage.
The Baa3 rating reflects Rowan's position within the offshore drilling
market as a leading provider of premium jack-up rig services.
Although still smaller than many of peers in terms of the number of rigs
that it provides, even after this acquisition and recent newbuilds,
the quality of the fleet largely serves as a mitigating factor.
The Baa3 rating is tempered by the company's still relatively smaller
fleet size, its focus on the more volatile jack-up,
and the added volatility of the land rig and manufacturing businesses.
The last rating action for Rowan Companies, Inc. was on July
15, 2009 when we assigned new ratings to the company.
The principal methodology used in rating Rowan was Moody's Global Oilfield
Services Rating Methodology, published in December, 2009 and
available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Rowan Companies, Inc. is headquartered in Houston,
Texas, and is a leading provider of offshore drilling services,
drilling rig manufacturing services, and land drilling services.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Moody's changes Rowan's outlook to negative
No Related Data.
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