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Global Credit Research - 19 Apr 2011
Approximately $2.1 billion of rated debt affected
New York, April 19, 2011 -- Moody's Investors Service affirmed Frac Tech Services, LLC's
(Frac Tech) B1 Corporate Family Rating (CFR) and changed the rating outlook
to negative from stable. Moody's also placed the B2 rating
on the company's $550 million senior notes due 2018 under
review for possible upgrade. These rating actions follow the announcement
that an investor group including Temasek Holdings (Private) Limited and
RRJ Capital (Investor Group) is acquiring the majority shareholder of
Frac Tech. Moody's assigned a B1 CFR to a new holding company,
Frac Tech International LLC, formed to acquire Frac Tech's
equity ownership and a B2 rating to its proposed $1.7 billion
term loan facilities. The rating outlook for Frac Tech International
is also negative. The term loan rating is subject to a review of
the final documentation and capital structure.
"Despite the very large increase in debt from this buyout,
we affirmed the B1 CFR due to Frac Tech's currently strong earnings
and the good prospects for free cash flow generation and debt reduction
over the next year and a half," commented Pete Speer,
Moody's Vice-President. "However, our
negative outlook highlights the risk that the company doesn't execute
on its earnings growth and leverage reduction plan in advance of the next
cyclical downturn in demand for its services."
Frac Tech International will use a substantial cash equity investment
by the Investor Group and the proceeds from a $1.5 billion
term loan to purchase the majority equity ownership in Frac Tech and make
a cash distribution to Chesapeake Energy Corporation (Chesapeake,
rated Ba2 CFR). Following the transaction, the Investor Group
will own 70% of Frac Tech International, with the remaining
30% primarily owned by Chesapeake.
The B1 CFR of Frac Tech International is supported by Frac Tech's
high quality fleet of fracturing equipment and substantial market position
in several U.S. producing basins. The rating is restrained
by the significant amount of debt relative to the tangible asset base,
the cyclicality of demand for its services and its concentration in one
service line. While pressure pumping demand and pricing is currently
strong, Frac Tech competes with Schlumberger (rated A1), Baker
Hughes (rated A2) and Halliburton (rated A2). These are much larger
companies with deeper financial resources and diverse product and service
Pro forma for the significant increase in term loan debt from the acquisition,
consolidated Debt/EBITDA at December 31, 2010 was around 2.7x
based on annualized fourth quarter 2010 EBITDA. This pro forma
leverage is acceptable for the B1 CFR, but this metric would rapidly
deteriorate in a cyclical downturn in drilling activity. The company
plans to generate significant free cash over 2011 and 2012 and reduce
its term loan borrowings. This forecast is supported by positive
industry fundamentals and the company's meaningful committed contract
cover into 2012. The negative outlook could be changed to stable
if the company executes on its debt reduction plans. Conversely,
further increases in debt levels to fund capital expenditures, acquisitions
or dividends to shareholders could result in a ratings downgrade.
Pursuant to the change of control provision in the senior notes indenture,
Frac Tech will have to offer to redeem the senior notes at 101%
of par value plus accrued interest following the closing of the acquisition.
In order to fund this potential redemption, Frac Tech International
will utilize a committed $200 million delayed draw term loan,
cash balances at Frac Tech, and then additional contractually committed
equity funding from the Investor Group. Frac Tech had approximately
$292 million of cash at December 31, 2010 and is expected
to not reduce its cash balance below $150 million to fund the notes
redemption in order to maintain adequate liquidity.
The proposed Frac Tech International term loan will be secured by the
equity ownership in Frac Tech and mature in five years from closing.
The term loan will require 1% annual amortization and that Frac
Tech distribute the maximum permissible quarterly restricted payments
under its senior notes indenture to Frac Tech International to provide
cash for debt service, accelerated principal repayment, and
permissible distributions to equity owners to cover taxes. Since
the term loan will be structurally subordinated to the senior notes and
other liabilities of Frac Tech, the term loan has been rated B2
(LGD 4, 68%), one notch beneath the B1 CFR.
The existing senior notes will benefit from their structurally superior
position in the capital structure relative to the term loan. In
addition, Frac Tech management decided not to close the committed
$200 million senior secured credit facility that was planned in
connection with last year's notes offering, eliminating this potential
priority claim to the assets. Therefore the existing B2 senior
notes rating is likely to be upgraded one to two notches depending on
the amount of notes actually redeemed and use of the delayed draw term
loan, final provisions in the term loan agreement restricting future
senior secured debt at Frac Tech and other considerations. The
review of the notes rating will be concluded following the completion
of the change of control offer. Frac Tech's B1 CFR will be
withdrawn at that time as it is effectively being replaced by the CFR
at Frac Tech International.
The principal methodology used in rating Frac Tech was the Global Oilfield
Services Industry Methodology, published December 2009.
Frac Tech Services, LLC is a privately held oilfield services company
headquartered in Cisco, Texas. The company is one of the
largest providers of hydraulic fracturing services in North America.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates proposed Frac Tech term loan B2
250 Greenwich Street
New York, NY 10007
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