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Rating Action:

Moody's downgrades Rowan to B3; outlook negative

10 Jul 2018

Approximately $2.5 billion of rated debt affected

New York, July 10, 2018 -- Moody's Investors Service (Moody's) downgraded Rowan Companies, Inc.'s (Rowan) Corporate Family Rating (CFR) to B3 from B2, Probability of Default Rating (PDR) to B3-PD from B2-PD, and senior unsecured notes to Caa1 from B2. The Speculative Grade Liquidity Rating was affirmed at SGL-1. The rating outlook remains negative.

"The downgrade reflects Rowan's deteriorating credit metrics through 2019, resulting from low utilization rates and continued pressure on dayrates, while the notes downgrade additionally reflects its contractual subordination to Rowan's new revolving credit facility, which has guarantees from material Rowan subsidiaries and thereby has a priority claim to Rowan's assets" commented Amol Joshi, Moody's Vice President. "The negative outlook reflects the uncertain timing and magnitude of a recovery in the challenged offshore drilling market, especially for drillships, and Rowan's increasing financial leverage despite pro-active maturity management and liquidity enhancing efforts."

Issuer: Rowan Companies, Inc.

Downgraded:

Corporate Family Rating, Downgraded to B3 from B2

Probability of Default Rating, Downgraded to B3-PD from B2-PD

Senior Unsecured Notes, Downgraded to Caa1 (LGD4) from B2 (LGD4)

Affirmed:

Speculative Grade Liquidity Rating, Affirmed SGL-1

Outlook Action:

Outlook, Remains Negative

RATINGS RATIONALE

Rowan's B3 CFR reflects its high and increasing financial leverage with deteriorating cash flow as existing contracts roll-off, combined with the muted outlook for utilization rates and dayrates at least through 2019. Despite some re-contracting of its jackups, Rowan's rig fleet -- specifically its ultra-deepwater drillships -- will be unlikely to gain profitable new long-term contracts for some time. Rowan is supported by its business profile, which is underpinned by its leading market position as a provider of premium jackup drilling rigs to the offshore market. The company has a reputation for its operational expertise and for having a relatively young rig fleet that is geographically well-diversified. The company's move into the ultra-deepwater drillship market also has long-term benefits in a more stable offshore drilling rig demand environment. However, none of the company's four ultra-deepwater drillships have long-term contracts at this time while two have short-term contracts in the second half of 2018, straining the company's cash flow. Rowan has considerable balance sheet cash; however, any significant use of cash to acquire uncontracted assets or to pursue shareholder friendly actions would put downward pressure on the company's ratings.

ARO Drilling (ARO, unrated), which is the company's joint venture with Saudi Aramco (unrated), owns a fleet of five jackups for operation in the Arabian Gulf for Saudi Aramco. ARO will likely purchase at least 20 new build jackups ratably over 10 years, with the first rig expected to be delivered as early as 2021. Saudi Aramco will provide drilling contracts to ARO in connection with the acquisition of the new rigs. In the event ARO has insufficient cash from operations or is unable to obtain third party financing, Rowan may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion.

Rowan's SGL-1 liquidity rating reflects the company's very good liquidity, including $1.2 billion of balance sheet cash at March 31. With no new builds in the near-term except for potential ARO obligations, the company's capital spending requirements should remain relatively low. However, Moody's expects Rowan's 2018 spending will be higher than 2016-17 as Rowan purchased two jackups in early January, and will spend about $85 million related to jackup upgrades required by Saudi Aramco for contracted work, a portion of which will be reimbursed. Moody's expects 2019 capital spending to be at maintenance levels due to a challenged offshore drilling market, which can be comfortably funded through available cash. External liquidity is available through a new $955 million revolving credit facility which matures in May 2023, but could mature earlier in February 2022 if Rowan fails to refinance its 4.875% senior unsecured notes by that time. Rowan continues to have access to its previous revolving credit facility maturing in January 2021, with $311 million of current borrowing capacity, dropping to $251 million in January 2019, and to $100 million in January 2020. As of May 31, both the company's revolving credit facilities were undrawn. The new credit facility's financial covenants include a maximum debt to capitalization ratio of 55%, minimum liquidity requirement of $300 million, minimum 80% coverage ratio of the value of rigs directly wholly owned by the borrower or guarantors to the value of all rigs, and a minimum 3x coverage ratio of the value of marketed rigs directly wholly owned by the borrower or guarantors to revolver commitments and certain other debt. Rowan has a debt maturity in August 2019 when $201 million of its 7.875% senior notes mature, which the company could repay with cash on hand.

Rowan's senior notes are unsecured and are all rated Caa1, a notch below the B3 CFR, because of their contractual subordination to the new revolving credit facility which is unsecured but benefits from operating subsidiary guarantees. The new revolver has a superior claim to the large majority of Rowan's drilling rigs, while the old revolver is unsecured and pari passu with the senior notes.

The negative outlook reflects Rowan's increasing financial leverage and the prolonged nature of the current offshore industry downturn, particularly in the deepwater.

The ratings could be downgraded if the company significantly depletes its existing cash balances or its liquidity weakens. Without significant debt reduction, a positive rating action is unlikely in the near-term. An upgrade could be considered if the company's EBITDA to interest expense exceeds 2x while maintaining adequate liquidity in a stable to improving industry environment.

The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Rowan is a global provider of offshore contract drilling services.

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 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.

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.

Amol Joshi, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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