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Rating Action:

Moody's rates Pacific Drilling CFR at Caa2; Outlook Stable

07 Sep 2018

$1 billion of new debt rated

New York, September 07, 2018 -- Moody's Investors Service, ("Moody's") assigned ratings to Pacific Drilling S.A. (PacDrilling), including a Caa2 Corporate Family Rating (CFR), a Caa2-PD Probability of Default Rating (PDR), a Caa1 first lien senior secured notes rating and a Caa3 second lien senior secured notes rating. Moody's also assigned an SGL-3 Speculative Grade Liquidity (SGL) rating. The rating outlook is stable.

In response to the headwinds facing the offshore services industry, near-term debt maturities and liquidity constraints PacDrilling filed for Chapter 11 bankruptcy protection in November 2017. On July 31, 2018 the company filed a plan of reorganization to deleverage the company's balance sheet and strengthen its liquidity. The reorganization plan includes repayment of $1.1 billion of debt and equitization of $1.9 billion of debt claims, resulting in pro forma debt of $1 billion and cash of approximately $400 million at emergence. In order to implement the plan, the company will be raising $700 million of first lien secured notes, $300 million of 2nd lien secured notes and $500 million of equity through a rights offering. Proceeds from the issuance of the secured notes will be funded into escrow and will be released towards repayment of debt at emergence from Chapter 11.

"PacDrilling's ratings reflect the company's relatively small scale, weak cash flows owing to anemic industry conditions and high recontracting risk, offset by substantially reduced debt burden post-emergence and high quality fleet. The company will also need to demonstrate its ability to put some rigs back to full operational mode and back to work, and more conservative financial policies post its emergence from bankruptcy," commented Sreedhar Kona, Moody's Senior Analyst. "PacDrilling's adequate liquidity position post-emergence mitigates near-term default risk and contributes to the stable outlook."

Debt List:

Assignments:

..Issuer: Pacific Drilling, S.A.

.Corporate Family Rating, Assigned Caa2

.Probability of Default Rating, Assigned Caa2-PD

.1st lien senior secured notes rating, Assigned Caa1 (LGD 3)

.2nd lien senior secured notes rating, Assigned Caa3 (LGD 5)

.... Speculative Grade Liquidity Rating, Assigned SGL-3

Outlook Actions:

..Issuer: Pacific Drilling, S.A.

....Outlook, assigned stable

RATINGS RATIONALE

PacDrilling's Caa2 CFR is constrained by the company's relatively small scale with seven drillships, poor market demand and industry overcapacity, and high financial leverage despite debt reduction through balance sheet restructuring. Although there is a moderate prospect of contracting additional drillships in 2019, the company currently has one of its drillships contracted through the third quarter of 2019 and one of its clients recently exercised its option to contract another drillship for an additional year of work commencing in mid-2019. Unless there is substantial improvement in offshore sector's fundamentals, PacDrilling will be challenged to command high dayrates and generate significant cash margins even with the improvement in the utilization of its drillships. The company must also demonstrate its renewed financial discipline and execution track record through recontracting of its drillships and positive free cash flow generation.

PacDrilling has significantly improved its asset coverage, in addition to reducing its financial leverage and modestly improving interest coverage due to $1.9 billion of debt reduction through Chapter 11 bankruptcy. The company was also able to mitigate its near term maturity risk by extending its nearest maturity to 2023. The company's adequate liquidity position through significant balance sheet cash will offset the risk of default risk from the company's inability to generate positive free cash flow through 2019. The company benefits from a young and a high quality fleet operated by a management team highly experienced in the sector.

The $700 million first lien senior secured notes due 2023 are rated Caa1, one notch above the CFR, under the Moody's Loss Given Default methodology. The secured facility benefits from its first lien claim on substantially all assets of PacDrilling and its priority claim over the $300 million second lien secured notes with a maturity after 2023. The second lien secured notes are rated Caa3, one notch below the CFR reflecting the size of the first lien secured notes in comparison to the second lien notes and also the subordination of the second lien notes to the first lien notes.

PacDrilling will maintain adequate liquidity profile as reflected in its SGL-3 rating because of its sizable cash balance. Pro forma, the company's emergence from Chapter 11, PacDrilling will have approximately $400 million of cash on the balance sheet. In the short-term, the company will not be able to generate sufficient cash flow from its operations to meet its debt service and capital expenditures needs. Through 2019, Moody's projects, PacDrilling will consume approximately $110 million of balance sheet cash to meet its liquidity needs. PacDrilling's secured first lien and second lien notes facilities will not have any financial maintenance covenants. The company's assets are fully encumbered by the secured facilities limiting the ability to raise cash through asset sales.

The ratings outlook is stable given the company's liquidity position due to substantial balance sheet cash, which will offset the near-term negative free cash flow.

PacDrilling's ratings could be downgraded if the company consumes cash at a greater rate than projected and results in a significantly deteriorated liquidity situation.

A ratings upgrade is unlikely in the near-term. PacDrilling's ratings could be considered for an upgrade if the company is able to contract its rigs at dayrates that result in sufficient EBITDA to improve cash interest coverage ratio to exceed 1.0x

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.

Headquartered in Luxembourg, Pacific Drilling S.A. (PacDrilling), is a provider of high-specification deepwater drilling services to the oil and gas industry.

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 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.

Sreedhar Kona
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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