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Rating Action:

Moody's downgrades Shelf Drilling's senior unsecured rating to B3; B2 CFR and stable outlook remain unchanged

22 Feb 2019

London, 22 February 2019 -- Moody's Investors Service ("Moody's") has today downgraded the senior unsecured notes issued by Shelf Drilling Holdings, Ltd. to B3 from B2. The B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating (PDR) of Shelf Drilling, Ltd. ("Shelf Drilling" or "Company") remain unchanged. The stable outlook of Shelf Drilling and Shelf Drilling Holdings, Ltd. remain unchanged.

RATINGS RATIONALE

The downgrade of the senior unsecured notes reflects Moody's estimate that the company is likely to draw down on its senior secured revolving credit facility (RCF) in the next 12 to 18 months. This is contrary to Moody's original expectation that the company would not draw down on its RCF. Moody's anticipates that Shelf Drilling's liquidity reserves will reduce over time, as the company faces a longer than expected downturn in the oilfield services industry. The incurrence of upfront mobilization costs related to the contemplated acquisition of two newbuild rigs will put additional pressure on the company's liquidity.

Today's action follows Shelf Drilling's contemplated acquisition of two newbuild premium jack-up rigs using equity proceeds, and the addition of two other similar rigs through bareboat charter transactions, which are expected to complete during Q2 2019. The contemplated transactions will improve the company's earnings once the rigs are contracted as well as reduce the average age of the fleet. Whilst the specification of these new rigs should provide a competitive edge, Moody's also notes that they have not been contracted yet.

Moody's continues to have limited visibility on the Shelf Drilling's earnings beyond the first half of 2019 when a number of contracts expire. Tendering activity has increased through 2018, but Moody's expects the company to renew contracts at the prevailing lower day rates for most rigs. This will lead to a decline in EBITDA at least through 2019, an increase in Moody's-adjusted debt/EBITDA ratio above 8.0x through 2019 and reduced headroom under the covenants. Negative pressure on the company's corporate family rating could materialize in case of continued weakness in contracting activity and day rates.

Positively, the company's liquidity remains healthy at this low point in the cycle. Despite a likely draw down under the RCF, Moody's expects sources of capital to exceed uses in the next 12 to 18 months. Liquidity is supported by a cash balance of $67 million and an undrawn RCF of $225 million as of 30 September 2018.

STRUCTURAL CONSIDERATIONS

Shelf Drilling Holdings, Ltd.'s $900 million senior unsecured notes due in February 2025 are rated one notch below the company's CFR in accordance with Moody's Loss Given Default methodology. The notes rank below the company's $225 million of senior secured RCF due in April 2023. The notes benefit from a guarantee representing nearly all of the company's assets.

RATIONALE FOR OUTLOOK

The stable outlook reflects Moody's expectation that Shelf Drilling has significant liquidity to weather a challenging operating environment and that it will re-contract rigs as they come off contracts in 2019, although at lower day rates.

WHAT COULD CHANGE THE RATINGS DOWN/UP

Moody's could upgrade the ratings if Shelf Drilling is able to re-contract rigs as they roll off and find new contracts for its available rigs such that Moody's-adjusted debt/EBITDA decreases below 4.0x on a sustained basis.

Conversely, Moody's could downgrade the ratings if the assumption that rigs rolling off contracts in 2019 will be re-contracted weakens such that the likelihood of further downside to EBITDA increases and leverage -- defined as Moody's-adjusted debt/EBITDA -- fails to recover towards 5.0x; if the ratio of EBITDA to interest falls below 1.0x; or if liquidity weakens including limited headroom under its covenants.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Shelf Drilling Holdings, Ltd.

....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 from B2

PRINCIPAL METHODOLOGY

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.

The Local Market analyst for these ratings is Thomas Le Guay, +971 (423) 795-45.

CORPORATE PROFILE

Shelf Drilling, Ltd. (Shelf Drilling) is a Cayman Islands-incorporated holding company that owns 38 independent-leg cantilever jackup rigs and one swamp barge rig, and conducts drilling operations through various subsidiaries in the Southeast Asian, Middle Eastern, Indian, West African and North African/Mediterranean markets. Shelf Drilling generated revenues of $605 million and EBITDA of $100 million as of 30 September 2018 LTM (after Moody's adjustments). Upon closure of the contemplated transaction, the company will have an estimated 40.8% free float on the Norwegian OTC, in addition to 19.4% ownership by China Merchants Group and equal 12.5% ownership by three private equity sponsors — Lime Rock Partners, CHAMP Private Equity and Castle Harlan Inc.

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.

Mikhail Shipilov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
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Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
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