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Rating Action:

Moody's downgrades PGS's CFR to Caa1; outlook negative

14 Jul 2020

London, 14 July 2020 -- Moody's Investors Service ("Moody's") today downgraded PGS ASA (PGS)'s corporate family rating (CFR) to Caa1 from B3, its probability of default rating to Caa2-PD from B3-PD and the ratings assigned to its senior secured term loan B (TLB) and revolving credit facility (RCF) to Caa1 from B3. The outlook on all ratings was changed to negative from ratings under review.

This concludes the review for downgrade initiated by Moody's on 15 April 2020.

RATINGS RATIONALE

The rating downgrade reflects the increased pressure weighing on the group's liquidity profile as well as its highly leveraged capital structure, which may prove unsustainable in the absence of any material recovery in operating profitability amid continuing weak seismic market conditions.

At the end of Q1 2020, PGS had fully drawn its $350 million RCF (up from $180 million drawn on 31 December 2019) and held unrestricted cash balances of $267 million compared to $41 million at year-end 2019. However, the reduction in the size of its RCF to $215 million scheduled in September 2020, will trigger the obligation for the group to repay drawings of $135 million. Also, while the senior secured TLB is covenant-lite and has no financial maintenance covenants, the RCF is subject to a net total leverage and minimum liquidity covenant, under which headroom may significantly reduce should the group's cash flow generation sharply deteriorate in coming months.

PGS's ability to secure an extension of the scheduled $135 million reduction of the RCF in September 2020 and amortisation holidays under its export credit financing due 2025 and 2027 would be positive from a liquidity management's standpoint. However, Moody's considers that PGS will, in any case, be left with a capital structure that may prove unsustainable given the sharp decline in revenue and cash flow generation it is expected to experience in coming quarters.

Moody's acknowledges the significant improvement in cost structure achieved by PGS since the 2015-2016 downcycle and further reductions it is currently implementing with a view to lowering its annual gross cash cost run-rate to approximately $400 million (based on operating five 3D vessels). However, demand for seismic services has significantly weakened amid ongoing downward revisions of 2020 capital expenditure budgets by oil and gas majors and independent E&P (exploration and production) companies. This will put significant pressure on PGS's operating profitability and cash flow generation.

In 2020, Moody's expects adjusted EBITDA to decrease by more than 40% to around $330-350 million from $596 million in 2019, even though reduced capex should help keep PGS broadly free cash flow (FCF) neutral. While the NOK850 million rights issue completed in Q1 2020 together with the balance of $24 million in proceeds from the sale of Ramform Sterling should help PGS reduce debt by around $120 million in 2020, leverage will materially increase with Moody's-adjusted total debt to EBITDA (after deducting multiclient capital spending) above 7x at year-end 2020.

In addition, Moody's cautions that the ongoing discussions PGS is currently holding with its banks in order to secure an extension of the $135 million tranche of the RCF maturing in September 2020 and deferral of scheduled export credit financing amortisations would lead to some amendments to the terms of the facilities that may potentially be construed as a distressed exchange, which is a default under Moody's definition.

ESG CONSIDERATIONS

The recent spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines resulted in a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The oilfield services sector has been one of the sectors most significantly affected by the shock given its sensitivity to oil prices and investment activity within the oil and gas sector. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety, as well as the associated economic impact.

STRUCTURAL CONSIDERATIONS

The senior secured TLB and RCF are rated Caa1 in line with the corporate family rating and one notch above the PDR, which reflects Moody's expectation of the potential degree of recovery secured lenders would achieve in the event of a default. The senior secured facilities are guaranteed by the material subsidiaries of the group representing at least 80% of group EBITDA and assets. In addition, they benefit from a first security interest in substantially all the assets of the borrowers and guarantors, with the exception of Titan-class vessels, in which lenders hold an indirect second priority security interest.

RATINGS OUTLOOK

The negative outlook reflects Moody's concern that a prolonged downturn in the seismic market would lead to significantly lower operating profitability and cash flow generation placing increasing pressure on PGS's liquidity and leaving the group with an unsustainable capital structure.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

While unlikely at this juncture, a rating upgrade is predicated on a sustainable market recovery leading to an improved financial profile reflected in a Moody's-adjusted EBIT margin in mid-single digits and adjusted total debt to EBITDA (excluding multiclient capital spending) keeping below 6x on a sustained basis. An upgrade would require the group to be consistently FCF positive and maintain healthy liquidity.

The Caa1 rating could be downgraded should the group fail to shore up its liquidity profile or Moody's expectations be for a potentially lower range of recoveries. A rating downgrade would also be considered should pronounced market weakness keep the group's EBIT margin negative and Moody's-adjusted total debt to EBITDA (excluding multiclient capital spending) above 7.0x for an extended period.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062654. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

PGS ASA is one of the leading offshore seismic acquisition companies with worldwide operations. PGS headquarters are located at Oslo, Norway. The company is a technologically leading oilfield services company specializing in reservoir and geophysical services, including seismic data acquisition, processing and interpretation, and field evaluation. PGS maintains an extensive multi-client seismic data library. For the year ended 31 December 2019, PGS reported Segment EBITDA of $556 million on Segment revenues of $880 million. PGS is a public limited company incorporated in the Kingdom of Norway and is listed on the Oslo Stock Exchange.

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 action(s) 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.

Francois Lauras
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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