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Rating Action:

Moody's rates proposed Frac Tech term loan B2

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.

RATINGS RATIONALE

"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 lines.

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.

REGULATORY DISCLOSURES

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.

New York
Peter Speer
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's rates proposed Frac Tech term loan B2
No Related Data.
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