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Rating Action:

Moody's downgrades ION Geophysical's CFR to B3; outlook negative

Global Credit Research - 04 Dec 2013

Approximately $175 million of rated debt affected

New York, December 04, 2013 -- Moody's Investors Service downgraded ION Geophysical Corporation's (ION) Corporate Family Rating (CFR) to B3 from B2, its Probability of Default Rating (PDR) to B3-PD from B2-PD, its $175 million senior secured notes to Caa1 from B3, and its Speculative Grade Liquidity Rating to SGL-3 from SGL-2. The rating outlook is negative.

"ION's ratings downgrade and negative outlook reflects weaker fundamental performance than originally anticipated in the B2 CFR rating," commented Gretchen French, Moody's Vice President. "In addition, the company has not built up its cash cushion as previously factored into the B2 rating, leaving the company with less financial flexibility to fund potential legal contingencies and weather industry cycles."

Issuer: ION Geophysical Corporation

Rating Downgrades:

....Corporate Family Rating to B3 from B2

....Probability of Default Rating to B3-PD from B2-PD

....$175 Million Senior Secured Notes due in 2018, to Caa1 (LGD 5, 70%) from B3 (LGD 4, 68%)

....Speculative Grade Liquidity rating to SGL-3 from SGL-2

Outlook Actions:

....Outlook Changed to Negative from Stable

RATINGS RATIONALE

The rating downgrade reflects ION's deterioration in EBITDA and cash flow generation during 2013, increasing leverage based on debt/EBITDA less multi-client capex. In addition, the company's cash balances have fallen below original expectations, while its potential exposure to legal contingencies has increased above the $106 million originally assumed in the B2 rating. Moody's outlook for ION's performance in 2014, even assuming a recovery in earnings from recent trough levels and the benefit of a reduced cost structure, is lower than previously anticipated, which puts ION's credit profile more in line with our B3 rated peers.

ION's B3 CFR continues to reflect its exposure to the highly volatile and cyclical seismic sector, which is typically the first sub-sector in the oilfield services industry to decline in a down-cycle and the last sub-sector to benefit from an up-cycle recovery. This exposure results in significant earnings and cash flow volatility, and limits debt capacity. The rating is further constrained by uncertainties related to the ultimate cash impact of ION's litigation with WesternGeco. The rating is supported by ION's long track record in the seismic sector, with good product line and geographic diversity within the seismic sector, low fixed costs and a high level of capital spending flexibility.

ION's SGL-3 Speculative Grade Liquidity rating reflects an adequate liquidity profile through the end of 2014. While ION has an undrawn $175 million credit facility due March 2015 and $88 million of cash at September 30, 2013, the company's cash balances have eroded below initial projections and its litigation exposure has increased. ION's SGL-3 rating is supported by sufficient cushion under its maintenance financial covenants. We have assumed that ION would have full access to its revolving credit facility to fund any unfavorable legal judgments.

The Caa1 rating on ION's $175 million of second priority senior secured notes due 2018 reflects both the overall probability of default of ION, to which Moody's assigns a PDR of Caa1-PD, and a loss given default of LGD 4 (70%). The senior secured notes are guaranteed by essentially all material domestic subsidiaries on a senior secured basis, but second in priority to ION's first priority $175 million senior secured credit facility. The notes do not benefit from upstream guarantees from ION's foreign subsidiaries or its joint ventures. The size of potential first priority claims relative to the second priority notes outstanding results in the notes being notched one notch below the B3 CFR under Moody's Loss Given Default Methodology.

The negative rating outlook reflects concern regarding the degree of success ION will have in generating sufficient free cash flow in 2014 in order to help build up its cash balances.

The ratings could be downgraded if ION's earnings and liquidity profile further weakens, including meaningful declines in its cash balances or a need to fund an unfavorable legal judgment in excess of $125 million.

The outlook could be stabilized if ION is able to build and maintain a cash cushion above $125 million in 2014 and completes a long term extension of its revolving credit facility.

The ratings could be upgraded if ION substantially improves its liquidity position while sustaining low financial leverage (debt/EBITDA less multi-client capital spending below 3.5x), assuming reasonably favorable resolution of ION's litigation exposure and continued supportive market conditions.

The principal methodology used in this rating was the Global Oilfield Services Rating Methodology published in December 2009. 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.

ION Geophysical Corporation provides seismic services and products to the global energy industry and is headquartered in Houston, TX.

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.

Gretchen French
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades ION Geophysical's CFR to B3; outlook negative
No Related Data.

 

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