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Rating Action:

Moody's downgrades Altera Infrastructure L.P.'s rating to Caa1; outlook stable

31 Mar 2020

London, 31 March 2020 -- Moody's Investors Service, ("Moody's") today downgraded Altera Infrastructure L.P.'s (Altera Infrastructure) Corporate Family Rating to Caa1 from B3 and assigned a Caa1-PD Probability of Default Rating (PDR). Concurrently, Moody's affirmed the Caa2 senior unsecured rating of $700 million notes. The outlook remains stable.

Altera Infrastructure L.P. changed its name from Teekay Offshore Partners L.P. on 24 March 2020.

RATINGS RATIONALE

The rating downgrade reflects Altera Infrastructure's continuing challenging liquidity position, as well as Moody's expectation of softening financial performance in 2020.

Altera Infrastructure's financial performance weakened in 2019 with reported adjusted EBITDA falling to $672 million from $783 million in 2018. While the decline was mainly driven by the absence of a $91 million settlement with Petrobras in the previous year, EBITDA generation would have fallen even without this extraordinary effect. In addition to the impact from the settlement with Petrobras in 2018, the FPSO segment was the main driver for the overall decline as it was impacted by lower revenues and EBITDA generation. The FPSO segment was impacted by a $33 million revenue decrease due to a $15m impact related to non-cash amortizations of in process revenues but also owing to reduced charter rates for the Piranema Spirit FPSO and a $30 million decrease due to the expiration of the Ostras FPSO charter contract in March 2019. As a result of lower EBITDA generation and only slightly reduced Moody's adjusted total debt of $3,306 million ($3,425 million in 2018), the company's Moody's adjusted debt to EBITDA ratio deteriorated to 5.5x at the end of 2019 compared with 5.1x in 2018. Moody's adjusted net debt to EBITDA increased to 5.0x in 2019 (including restricted cash of $89 million at the end of 2019) compared with 4.8x in 2018.

For 2020 Moody's expects a further decline of revenues and EBITDA generation driven by lower Shuttle Tanker and Towage revenues as contracts of affreightment (CoA) volumes for Shuttle Tankers and utilization of the Towage fleet are likely to decline. High capital expenditures (albeit fully financed) of more than $400 million in 2020 for the delivery of four new Shuttle Tankers will result in material negative Free Cash Flow generation and the need to increase the debt level. Accordingly, the rating agency projects credit metrics to deteriorate further with Moody's adjusted debt to EBITDA between 6.5x and 7x at the end of 2020.

In addition to Moody's expectations of falling profitability in 2020 and weakening credit metrics, Altera Infrastructure's credit profile remains constrained by significant amortization payments and term loan maturities that must be funded with vessel refinancing or the sale of end of life cycle vessels; contract renewal risk FPSO and FSO in the next few years; concentration risk with one customer (the Knarr oil field which is operated by Royal Dutch Shell), largely under one contract that makes up over half of FPSO EBITDA.

Altera Infrastructure's credit profile is supported by relatively stable and contracted nature of its cash flow; high barriers-to-entry for competing FPSOs in long-lived fields; and its strong shuttle tanker market position in the North Sea. Moody's also notes positively the recent $170 million investments by the owner Brookfield Business Partners L.P. (Brookfield) for the purchase of the 27% of equity in Altera Infrastructure that Brookfield did not yet own.

ESG CONSIDERATIONS

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The oil services and midstream sectors are sectors that could be significantly affected. More specifically, Altera Infrastructure's credit profile is vulnerable to shifts in market sentiment in these unprecedented operating conditions, the company is vulnerable to the outbreak continuing to spread and relies on access to the banking market. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Moody's considers the company's approach to liquidity management as a governance factor under its ESG framework.

LIQUIDITY

Altera Infrastructure's liquidity is weak. At the end of 2019, the company had $306 million of cash (including $107 million of restricted cash) and undrawn $105 million under the unsecured revolving credit facility due October 01, 2020. Moody's believes Altera Infrastructure's ability to comply with its liquidity covenant, that states the company must maintain liquidity of at least $75 million or 5% of total debt (roughly $150 million), is uncertain.

At the end of 2019, the company had very material debt maturities of $487 million in 2020 (including the $125 million RCF provided by its owner Brookfield Business Partners L.P.) and further $338 million in 2021.

As Moody's expects negative aggregated free cash flow generation in 2020-21, Altera Infrastructure will need to continue to have full access to the capital markets and its relationship banks in order to fund the liquidity shortfall. The company has a track record of selling end of life cycle vessels and refinancing loans on its existing vessels, which however is less certain in the current crisis.

STRUCTURAL CONSIDERATIONS

The Caa2 rating assigned to the $700 million senior unsecured notes, one notch below the Caa1 Corporate Family Rating, reflects material structural subordination of prior ranking secured debt.

RATING OUTLOOK

While Moody's forecasts the company's operating performance to weaken in 2020 driven by declining revenues in the Shuttle Tanker and Towage segments, the stable outlook reflects the rating agency's expectation that the company will be able to fund its liquidity needs through refinancing.

WHAT COULD CHANGE THE RATING - UP

The ratings could be upgraded if the company's liquidity resources would be sufficient to cover all liquidity needs for at least 12 months without the need to rely on new financing and if Moody's adjusted debt to EBITDA falls to 6.5x or less.

WHAT COULD CHANGE THE RATING - DOWN

The ratings could be downgraded if the company's liquidity weakens or if Moody's adjusted debt to EBITDA increases to 8x or more.

The principal methodology used in these ratings was Midstream Energy published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Altera Infrastructure L.P. is a Marshall Islands limited partnership with headquarters in Bermuda and executive offices in Stavanger, Norway. Altera Infrastructure is an international provider of marine transportation, oil production, storage, long-distance towing and offshore installation and maintenance and safety services to the offshore oil industry.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

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.

Sven Reinke
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
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United Kingdom
JOURNALISTS: 44 20 7772 5456
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Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
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Client Service: 44 20 7772 5454

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