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Rating Action:

Moody's lowers Stallion's PDR to Caa1, Outlook Negative

15 Aug 2008
Moody's lowers Stallion's PDR to Caa1, Outlook Negative

Approximately $750 million of rated debt affected

New York, August 15, 2008 -- Moody's Investors Service downgraded the Probability of Default Rating (PDR) for Stallion Oilfield Services Ltd. (Stallion) to Caa1 from B3, and changed the rating outlook to negative. Moody's affirmed Stallion's B3 Corporate Family Rating (CFR), the Caa1 (LGD3, 48% changed from LGD4, 66%) rating on its $300 million senior unsecured notes and $250 million senior unsecured term loan, and the Ba3 (LGD1, 4% changed from LGD 2, 10%) rating on its $75 million senior secured term loan and $175 million senior secured revolver.

Pete Speer, Moody's Vice-President commented, "Moody's downgrade of the probability of default rating and rating outlook highlights the increased risk of debt covenant violations. We believe it is likely that Stallion will require some combination of sponsor equity infusions and reduced capital expenditures in order to avoid violating its reduced leverage covenant at the end of 2008."

The leverage ratio covenant in Stallion's senior unsecured term loan steps down from 5.25x to 4.25x at December 31, 2008. As of June 30, 2008, Stallion's Debt/Pro forma LTM EBITDA exceeds 4.25x and the company will need substantial sequential EBITDA growth over the next two quarters to comply with this covenant at year-end, particularly given Stallion's recently increased capital expenditure budget for the second half of 2008. If the expected EBITDA growth is not realized, the company will need additional equity investments and/or will have to reduce capital spending in order to pay down debt and avoid a covenant breach.

Stallion is controlled by private equity funds managed by the Carlyle Group and Riverstone Holdings LLC, which have invested $122 million in Stallion through June 30, 2008 and are expected to invest an additional $13 million to fund a capital project. Carlyle/Riverstone has an additional $40 million designated for investment in Stallion, but that would be at its discretion. The amount of additional capital necessary will depend on the company's second half operating performance and how quickly management could reduce capital expenditures. Moody's notes that if EBITDA were to grow sequentially by 5% in the 3rd and 4th quarters, Stallion would need substantially all of Carlyle/Riverstone's designated capital for debt reduction and a significant curtailment in capital expenditures.

Based on Stallion's EBITDA levels, the current favorable market conditions for oilfield services, and the book value of property, plant and equipment, Moody's believes that the company's enterprise value supports using a 65% recovery rate instead of our standard 50% under our LGD methodology. As a result, we have affirmed the CFR and debt instrument ratings. However, if market conditions were to deteriorate or Stallion's current underperformance was to worsen, the company's enterprise value could significantly decline.

The PDR could be returned to B3 if Stallion is able to significantly reduce its covenant compliance risk through improved operating performance, raising equity to retire debt either from its sponsor or public markets, and/or significantly reducing its capital expenditures. The outlook could also return to stable, but that would also depend on our outlook for market conditions at that time.

Stallion Oilfield Services Ltd. is a privately held oilfield services company based in Houston, Texas.

New York
Steven Wood
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Peter Speer
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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