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Related Issuers
Rating Action:

Moody's downgrades Paragon Offshore to Ba3 with negative outlook

14 Jan 2015

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
No Related Data.
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