Approximately $1.64 billion of debt instruments affected
New York, January 14, 2015 -- Moody's Investors Service downgraded Paragon Offshore plc's
(Paragon) Corporate Family Rating (CFR) to Ba3 from Ba2, senior
unsecured notes to B1 from Ba3, senior secured term loan to Ba1
from Baa3 and senior secured revolver to Ba1 from Baa3. The outlook
was changed to negative. The Speculative Grade Liquidity Rating
was affirmed at SGL-2.
"The downgrade reflects a rapid and significant deterioration in
offshore rig market fundamentals since mid-2014 and the high likelihood
that Paragon's older generation rigs will be challenged through
2016 to find new contracts and replace cash flows in a weak oil price
environment," said Sajjad Alam, Moody's Assistant
Vice President. "The mostly debt-funded acquisition
of Prospector Drilling Offshore S.A. (Prospector) in November
2014 has also raised Paragon's leverage despite improving overall
fleet quality."
Issuer: Paragon Offshore plc
..Downgraded:
.... Corporate Family Rating, Downgraded
to Ba3 from Ba2
.... Probability of Default Rating,
Downgraded to Ba3-PD from Ba2-PD
.... US$995 Million Senior Unsecured
Notes, Downgraded to B1 (LGD5) from Ba3 (LGD5)
.... US$650 Million Senior Secured
Term Loan, Downgraded to Ba1 (LGD2) from Baa3 (LGD2)
.... US$800 Million Senior Secured
Revolver, Downgraded to Ba1 (LGD2) from Baa3 (LGD2)
..Outlook Actions:
....Change to Negative from Stable
..Affirmed:
....Speculative Grade Liquidity Rating,
Affirmed SGL-2
RATINGS RATIONALE
Paragon's Ba3 CFR is restrained by its older generation standard capability
rigs, the need to upgrade its fleet over time, and the company's
limited deleveraging prospects following the acquisition of Prospector.
Paragon's jackups and floaters will face stiff competition from
newer high specification rigs as offshore markets cope with a large number
newbuild deliveries through 2016. Moreover, the recent collapse
in oil prices will reduce rig demand as upstream customers rethink and
rationalize their drilling plans. Consequently, there is
significant downside risk to Paragon's cash flows beyond 2015 and
a high likelihood of an increasing leverage trend. The Ba3 rating
is supported by Paragon's large and globally diversified rig fleet,
$2.4 billion contracted revenue backlog providing a degree
of revenue visibility through 2015, and our expectation of modest
free cash flow generation through 2016 which could be used to reduce debt,
increase liquidity or improve fleet quality. We also considered
the long, safe and efficient operating track record and the fit-for-purpose
nature of some of Paragon's standard spec rigs with a number of
key customers that should help retain/extend existing contracts,
although dayrates are expected to be lower for any new contract.
The negative outlook reflects the challenging industry environment,
Paragon's significant uncontracted position and the likelihood of
further degradation in credit metrics. Although we have not seen
any strong downward trend in Paragon's earnings and cash flows since
its separation from Noble Drilling Corporation (Baa3 stable) in August
2014, we believe we are in the early stages of a protracted downturn,
and the next two years will prove very challenging for Paragon and offshore
drillers that have older generation rigs. As of November 2014,
22 of Paragon's 41 rigs were scheduled to roll off contract by the
end of 2015, while an additional nine contracts were set to expire
in 2016.
While the acquisition of Prospector has added two high quality rigs (Prospector
1 and Prospector 5) with contractual revenue protection for two to three
years, the company has also added $500 million of new debt
in exchange for about $80 million in annual EBITDA. Prospector
has three more jackups under construction at roughly $200 million
each, pursuant to non-recourse construction agreements.
Should Paragon decide to acquire a third jackup (Prospector 6) in April
2015 and fund it with debt, there will be more pressure on the balance
sheet. It is highly unlikely that Paragon will acquire the remaining
three newbuilds without securing a multi-year contract first.
Prospector has a $270 million term loan and $100 million
of notes in its books and both have change of control provisions.
Paragon is currently exploring refinancing options for this debt.
Despite these negative developments, Paragon should have good liquidity
in 2015 which is captured in the SGL-2 rating. The company
will generate $100-$150 million of free cash flow
in 2015, thanks to its contract backlog. Like some of its
peers, Paragon may consider reducing/eliminating its cash dividends
in navigating the downturn, which would save up to $45 million
annually. The company has a $800 million revolving credit
facility a portion of which was used to acquire the shares of Prospector.
The revolver matures in 2019 and has two financial covenants -
minimum interest coverage of 3.0x and a maximum net leverage ratio
of 4.0x. The company should have sufficient headroom for
compliance with these covenants. Although substantially all of
the rigs are secured, we believe the company could sell some assets
to raise cash.
We could downgrade Paragon's ratings if it acquires more rigs with
debt financing or if the debt to EBITDA ratio rises above 4x. Given
the anticipated weakness in offshore drilling markets through 2016,
a positive rating action is unlikely in the near future.
The principal methodology used in these ratings was Global Oilfield Services
Industry Rating Methodology published in December 2014. 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.
Paragon Offshore plc is a publicly traded offshore drilling contractor
incorporated in the United Kingdom that operates in several major offshore
markets around the world.
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.
Sajjad Alam
Asst Vice President - Analyst
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 Paragon Offshore to Ba3 with negative outlook
