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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
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
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.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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