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Rating Action:

Moody's changes outlook on Petrofac's ratings to stable, affirms Ba1 CFR

22 Mar 2018

Frankfurt am Main, March 22, 2018 -- Moody's Investors Service, ("Moody's") has today changed to stable from negative the outlook on UK-based Petrofac Limited's ("Petrofac" or "group") ratings. At the same time, Moody's has affirmed the group's Ba1 corporate family rating (CFR), the Ba1 rating on the USD677 million senior unsecured notes due October 2018 and assigned a Ba1-PD probability of default rating (PDR).

"The outlook stabilization takes into account the improving trend in Petrofac's order intake during 2017 and in the first quarter of 2018, which was ahead of our expectations and indicates only limited, if any, reputational risk associated with the ongoing SFO investigation so far", says Goetz Grossmann, Moody's lead analyst for Petrofac. "It further recognizes the group's improved credit metrics in 2017, such as a 2.5x Moody's-adjusted debt/EBITDA ratio, which provide greater headroom for Petrofac in the Ba1 rating category", adds Mr. Grossmann.

RATINGS RATIONALE

The stabilization of the outlook follows Petrofac's solid results for the full year 2017, as shown by a healthy growth in order intake to USD5.2 billion in 2017 from USD1.9 billion in 2016, while a strong bidding pipeline underpins persistent high tendering activity. Although order backlog and revenue kept slowing in 2017, the declines were lower than Moody's had anticipated and revenue visibility has recently improved, as indicated by recovering book-to-bill ratio of 1.1x in the second half of 2017 (0.8x in 2017). Moody's also acknowledges that reputational risks from the ongoing Serious Fraud Office (SFO) investigation have been minimal so far, considering the decent growth in order intake amidst a still challenging industry environment. Moreover, thanks to strong project execution, an improved project mix and cost reductions, Petrofac's reported EBITDA (before exceptional items) increased to USD730 million in 2017 from USD704 million in the prior year, despite a substantial 19% drop in revenues. This, together with a 44% cut in capital expenditures (capex) and lower dividend payments, in line with the group's focus to reduce the capital intensity and consistent de-leveraging, helped to maintain positive free cash flow generation in 2017.

At the end of 2017, Petrofac's Moody's-adjusted debt/EBITDA ratio declined to 2.5x from 3.1x in 2016, whereas Moody's assumed the ratio to remain broadly stable. Recognizing management's commitment to further reduce net debt towards zero over the next two to three years, Moody's expects Petrofac's leverage to remain well below 3x, which would even meet the agency's guidance for an upgrade. That said, the rating assessment of Petrofac continues to incorporate the asymmetric risk associated with a potential severe adverse outcome of the SFO investigation, which could substantially impair the group's future earnings and cash flow generation. Also, the rating agency emphasizes the group's significant exposure to the volatile oil & gas sector and the susceptibility of its business to an abrupt slowdown in demand during times of tumbling oil prices as seen in 2015. Accordingly, the solidified positioning in the Ba1 rating category reflecting the improvement in credit metrics and sound liquidity does not imply any upward rating pressure in the near or medium term, also considering the ongoing investigation, which remains a downside risk in case of an unfavourable outcome.

The rating action further recognizes the group's conservative financial policy, illustrated by its rebased dividend policy and constant focus on debt reduction. This, together with lower capex spending should enable Petrofac to generate positive free cash flow (FCF) at least in 2019, whereas FCF will likely turn negative in 2018 mainly driven by expected sizeable working capital consumption. Moody's also expects the group to (at least partly) refinance its outstanding notes due October 2018 during the next few months and thereby to retain its sound liquidity profile.

LIQUIDITY

Petrofac's liquidity is adequate, even though the group will likely face a sizeable consumption in working capital this year. As of 31 December 2017, Petrofac had around USD970 million of cash on the balance sheet and USD645 million available under its USD1.2 billion revolving credit facilities. Moody's expects the group's cash sources to be sufficient to cover capex of at least USD150 million, dividends of around USD130 million and working capital spending, although free cash flow turns negative in Moody's 2018 base case. While available cash sources could also facilitate a full repayment of the outstanding USD677 million Senior Notes due in October 2018, Moody's expects the group to (at least partly) refinance the notes in the upcoming months.

The revolving credit facility sets financial covenants for net debt/EBITDA (excluding grossed up financial leases) at no more than 3.0x and EBITDA/interest cover of at least at 3.0x, which Moody's expects the group to comply with at all times.

Albeit not explicitly included in the liquidity assessment, Moody's recognizes the group's plan to dispose certain assets of its Integrated Energy Services business, which could free up additional sizeable cash balances that could be used for debt reduction.

RATING OUTLOOK

The stable outlook reflects Moody's expectation of Petrofac to continue to win new contracts and gradually stabilize its still shrinking order backlog through 2018. This should allow for return to organic revenue and EBITDA growth over the next two to three years. Assuming the group to focus on further debt reduction from available cash sources and potential proceeds from non-core asset disposals, Moody's expects leverage to be sustained at well below 3x debt/EBITDA over the next two years.

A potential negative impact of the SFO investigation, however, would need to be assessed once resolved and could result in negative pressure on the rating, notwithstanding the currently stable outlook.

WHAT COULD CHANGE THE RATING UP / DOWN

Given the ongoing SFO investigation, Moody's believes that an upgrade is unlikely in the near future. Nevertheless, if the outcome of the investigation was not to result in material fines and if there is no observed impact to customer behavior and order intake, Moody's could upgrade Petrofac's ratings. An upgrade would also require leverage (as measured by Moody's-adjusted debt/EBITDA) to be sustained at well below 3x and consistent positive free cash flow generation.

Moody's could downgrade Petrofac's ratings, if the SFO investigation was to result in large fines that would materially increase medium-term leverage expectations. A downgrade could also be triggered from an unexpected decline in order intake resulting from either a change in customer behavior (because of the SFO investigation) or ongoing challenges in the oil & gas industry.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Construction Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Petrofac Limited is incorporated in Jersey, UK and operates out of seven strategically located operational centres, in Aberdeen, Sharjah, Abu Dhabi, Woking, Chennai, Mumbai and Kuala Lumpur. It is a leading engineering and construction company focused on the oil and gas sector. In 2017, the group reported revenues and EBITDA of USD6.4 billion and USD730 million, respectively. As of December 2017, it had approximately 12,500 employees in 29 countries, mainly in the Middle East and Central Asia, but also in the UK and South East Asia.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Goetz Grossmann
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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