Approximately $6 billion of rated debt affected
New York, March 20, 2020 -- Moody's Investors Service, ("Moody's") downgraded
Valaris plc's (Valaris) Corporate Family Rating (CFR) to Caa3 from Caa1,
Probability of Default Rating (PDR) to Caa3-PD from Caa1-PD,
and senior unsecured notes to Ca from Caa2. The SGL-3 Speculative
Grade Liquidity Rating was unchanged. The rating outlook remains
negative.
"The downgrade reflects Valaris' unsustainable debt burden, large
projected negative free cash flow generation that will further erode liquidity,
and the high likelihood of a distressed exchange or debt restructuring
given the low trading prices of its debt, tightening liquidity,
and ongoing pressures from its largest shareholder to optimize the capital
structure," said Sajjad Alam, Moody's Senior Analyst.
Downgraded:
..Issuer: Valaris plc
.... Corporate Family Rating, Downgraded
to Caa3 from Caa1
.... Probability of Default Rating,
Downgraded to Caa3-PD from Caa1-PD
....Senior Unsecured Notes, Downgraded
to Ca (LGD4) from Caa2 (LGD4)
..Issuer: ENSCO International Incorporated
....Senior Unsecured Notes, Downgraded
to Ca (LGD4) from Caa2 (LGD4)
..Issuer: Pride International, Inc.
....Senior Unsecured Notes, Downgraded
to Ca (LGD4) from Caa2 (LGD4)
..Issuer: Rowan Companies, Inc.
....Senior Unsecured Notes, Downgraded
to Ca (LGD4) from Caa2 (LGD4)
Outlook Actions:
..Issuer: ENSCO International Incorporated
....Outlook, Remains Negative
..Issuer: Pride International, Inc.
....Outlook, Remains Negative
..Issuer: Rowan Companies, Inc.
....Outlook, Remains Negative
..Issuer: Valaris plc
....Outlook, Remains Negative
Afirmed:
..Issuer: Valaris plc
....Senior Unsecured Commercial Paper,
Affirmed NP
Unchanged:
..Issuer: Valaris plc
....Speculative Grade Liquidity Rating,
Unchanged at SGL-3
RATINGS RATIONALE
Valaris is facing elevated restructuring risk, diminishing liquidity
and poor industry conditions. Additionally, Valaris'
largest shareholder has been pressing the company to improve its capital
structure, which could lead to some form of debt restructuring.
The company has over $6 billion of balance sheet debt that has
an associated annual interest cost of $400 million. Management
also intends to spend $160 million in capex in 2020, including
on rigs that are idle but not generating any revenue. As a result,
negative free cash flow could be in excess of $400 million requiring
heavy borrowings on the revolving credit facility this year.
Additionally, the rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices,
and asset price declines are creating a severe and extensive credit shock
across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The Oilfield Services
(OFS) sector has been one of the sectors most significantly affected by
the shock given its sensitivity to demand and oil prices. More
specifically, the weaknesses in Valaris' credit profile have
left it vulnerable to shifts in market sentiment in these unprecedented
operating conditions and Valaris remains vulnerable to the outbreak continuing
to spread and oil prices remaining weak. We regard the coronavirus
outbreak as a social risk under our ESG framework, given the substantial
implications for public health and safety. Today's action
reflects the impact on Valaris' credit quality of the breadth and
severity of the oil demand and supply shocks, and the broad deterioration
in credit quality it has triggered.
Valaris should have adequate near term liquidity, which is reflected
in the SGL-3 rating. While the company had $100 million
in cash and $1.6 billion of availability under its committed
revolving credit facility at December 31, 2019, Moody's
expects less than $200 million in annual EBITDA generation and
potentially $700-$800 million in negative free cash
flow through 2021. The company also has to address a series of
debt maturities, including $123 million in 2020, $113
million in 2021, and $621 million in 2022. Although
the company should be able to use the revolver to refinance the smaller
2020 and 2021 maturities, the company will need to refinance the
$621 million 2022 notes on a permanent basis given the revolver's
maturity in September 2022. Moody's believes that Valaris has sufficient
headroom to comply with the financial covenants in its credit agreement
to maintain access to its revolver through mid-2021. Valaris
still has an unsecured capital structure and therefore, has the
capacity to raise debt on a secured basis, if capital markets conditions
permit.
Valaris' Caa3 CFR reflects its untenable capital structure, significant
ongoing negative cash flow generation and elevated near term distressed
exchange risk. The CFR also considers the weak fundamentals of
the deepwater drilling markets and the high re-contracting risk
Valaris faces beyond 2020. While contracting activity and dayrates
have recovered in shallow water markets since 2018, there is still
significant excess rig supply in deepwater and ultra-deepwater
markets. A protracted recovery in floater dayrates combined with
significant maintenance costs associated with idle rigs will continue
to hurt Valaris' earnings and deplete liquidity. Valaris'
primary credit supports include its large and high-quality rig
fleet, excellent diversification across geography, rig types,
and customers, and some contracted backlog, which stood at
$2.45 billion as of December 31, 2019.
Valaris' senior unsecured notes are rated Ca, one notch below the
Caa3 CFR given their structural subordination to the revolving credit
facility that benefits from rig-owning operating subsidiary guarantees.
The CFR could be downgraded in the event of a distressed exchange,
restructuring or bankruptcy filing. The ratings are unlikely to
be upgraded absent a material amount of debt reduction or improvements
to its cash flow situation. The CFR could be upgraded if fundamental
conditions and dayrates in offshore drilling markets meaningfully improve,
enabling the company to achieve interest coverage of at least 1x and sustainable
good liquidity.
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.
Valaris plc is headquartered in London, UK and is one of the world's
largest providers of offshore contract drilling services to the oil and
gas industry.
REGULATORY DISCLOSURES
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.
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
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
