Rating Action: Moody's downgrades Pacific Drilling's secured notes to Caa3; negative outlook
Global Credit Research - 12 Aug 2020
Approximately $1.1 billion of rated debt affected
New York, August 12, 2020 -- Moody's Investors Service, ("Moody's") downgraded Pacific Drilling S.A.'s (PacDrilling) Corporate Family Rating (CFR) to Ca from Caa2,Probability of Default Rating (PDR) to Ca-PD from Caa2-PD, first lien senior secured notes rating to Caa3 from Caa1 and second lien senior secured notes rating to C from Caa3. Moody's also downgraded the company's Speculative Grade Liquidity (SGL) rating to SGL-4 from SGL-3. The rating outlook was changed to negative from stable. Under Moody's ESG framework, social and governance risks were a factor in this rating outcome.
"The commodity price collapse in the first quarter of 2020 poses a substantial challenge for PacDrilling to improve its cash flow and its weak credit profile, as near-term improvement of offshore fundamentals is unlikely. Moreover, PacDrilling's default risk has increased significantly following its engagement of financial and legal advisors to evaluate alternatives, including chapter 11 bankruptcy protection, to address its capital structure," commented Sreedhar Kona, Moody's Senior Analyst. "PacDrilling's consumption of cash weakens is liquidity position and contributes to the negative outlook."
Debt List:
Downgrades:
..Issuer: Pacific Drilling, S.A.
...Corporate Family Rating, Downgraded to Ca from Caa2
...Probability of Default Rating, Downgraded to Ca-PD from Caa2-PD
...1st lien senior secured notes rating, Downgraded to Caa3 (LGD3) from Caa1 (LGD3)
...2nd lien senior secured notes rating, Downgraded to C(LGD5) from Caa3 (LGD5)
...Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-3
Outlook Actions:
..Issuer: Pacific Drilling, S.A.
....Outlook, changed to negative from stable
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL430326 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
PacDrilling's downgrade to Ca CFR reflects Moody's expectation that challenging offshore drilling fundamentals will not allow the company to improve its cash flow generation. The CFR reflects high likelihood of default and Moody's views on the potential overall recovery. The downgrade also considers PacDrilling's governance risk, including historical financial policies that led to accumulation of high debt loads and long periods of weak leverage and coverage, incompatible with the highly volatile industry. The company engaged in balance sheet restructuring in 2018 to reduce debt burden. Its recent engagement of financial and legal advisors to evaluate restructuring alternatives in order to address its unsustainable capital structure, including a potential chapter 11 bankruptcy filing, indicates further deterioration in the financial policy.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The OFS sector has been one of the sectors most significantly affected by the shock given its sensitivity to demand and oil prices. More specifically, the weaknesses in PacDrilling's credit profile have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and PacDrilling remains vulnerable to the outbreak continuing to spread and oil prices remaining weak. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on PacDrilling of the breadth and severity of the oil demand and supply shocks, and the broad deterioration in credit quality it has triggered.
The rating outlook is negative, reflecting the continued oversupply of deepwater and ultra-deepwater rigs reducing the likelihood of sufficient utilization or dayrate improvement for PacDrilling. The company will continue to erode its liquidity.
The $750 million first lien senior secured notes due in October 2023 are rated Caa3, one notch above the CFR, reflecting the secured facility's first lien claim on substantially all assets of PacDrilling and its priority claim over the $326 million second lien secured notes (as of June 30, 2020) with a maturity in April 2024. The company also put in place a $50 million first lien super priority revolving credit facility that matures in April 2023. The second lien secured notes are rated C, 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 and the revolving credit facility.
PacDrilling will have weak liquidity as reflected in its SGL-4 rating. As of the end of second quarter 2020, the company had a cash balance of $246 million and had no availability under its revolver. The company will not be able to generate sufficient cash flow from its operations to meet its debt service and capital expenditures needs. Through 2020 and 2021, the company will consume a significant portion of its cash balance to meet its liquidity needs. PacDrilling's revolving credit facility, secured first lien and second lien notes facilities do 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.
PacDrilling's Ca CFR is constrained by the company's relatively small scale with seven drillships, poor market demand and industry overcapacity, and high financial leverage. 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
PacDrilling's ratings could be downgraded if the company performs debt restructuring or files for chapter 11 bankruptcy protection.
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 company must also maintain adequate liquidity..
Headquartered in Luxembourg, Pacific Drilling S.A. (PacDrilling), is a provider of high-specification deepwater drilling services to the oil and gas industry.
The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062654. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings announced here are all unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL430326 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:
** Rating Solicitation
** Issuer Participation
** Participation: Access to Management
** Participation: Access to Internal Documents
** Disclosure to Rated Entity ** Endorsement ** Lead Analyst ** Releasing Office
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit 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.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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
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