CHICAGO–(BUSINESS WIRE)–Fitch Ratings has downgraded Offshore Drilling Holding S.A.’s (ODH) Long-Term (LT) foreign and local currency Issuer Default Ratings (IDRs) to ‘B-‘ from ‘B+’; the Rating Outlook is Negative. In addition, Fitch has downgraded its rating for the company’s USD950 million of senior secured notes to ‘B-/RR4’ from ‘BB-/RR3’.

The rating action reflects heightened re-contracting risk for ODH in light of Pemex’s, the company sole off-taker, marked reductions to its capital investment program overall and more specifically to Pemex’s reduction in deepwater activities. As part of Pemex’s MXN100 billion expenditure reduction, the company expects to reduce its 2016 investments in deep water exploration by approximately MXN10 billion and look instead for partners with which to carry on this activity in the future. This reduction in investments decreases the likelihood Pemex will continue requiring ODH’s drilling rigs in the short term and increases the company’s re-contracting risk once the renewed contracts start expiring towards the end of 2017.

The Negative Outlook considers the potential for a deeper and longer than forecasted offshore drilling down-cycle. The lower Recovery Rating reflects the distressed valuation of similar assets that have been sold recently to Ocean Rig UDW.

KEY RATING DRIVERS

ROLL-OVER AND DAY-RATES RISK

Throughout the oil and gas industry, companies are facing pressure to renegotiate day rates. While this potentially could impact ODH, a larger concern is the renewal of its contracts with Pemex that expire toward the end of 2017, given Pemex’s decision to significantly cut its investments in deepwater exploration. Prior to the change in Pemex’s management team, ODH extended its Centenario and Bicentenario drilling rig contracts with Pemex until December 2017 at a day rate of USD365,000/day.

OIL PRICE PRESSURES

Offshore drillers continue to face depressed market conditions due to lower demand and a significant oversupply of rigs. The severe decline in oil prices has compounded the effects of the offshore rig oversupply cycle resulting in continued global market day-rate deterioration. Fitch believes that demand for drill rigs will rebound in the medium-term and absorb the newer high-quality assets. We also believe that an uptick in demand for rigs will lag oil & gas price levels (estimated at $65 – $70/barrel for deepwater) by at least six-12 months.

PARTIAL STRUCTURAL SUBORDINATION

ODH’s senior secured notes are guaranteed by the unencumbered restricted subsidiaries that own the Centenario and Bicentenario drilling rigs. The notes are currently structurally subordinated to a project-finance bank loan of approximately USD320 million, related to the financing of La Muralla IV. This bank debt has certain cash-sweep provisions restricting cash flow distributions to ODH. The bank loan amortizes through 2018 and once it is repaid, La Muralla IV will become a co-guarantor for the notes.

MODERATELY HIGH LEVERAGE

Fitch expects consolidated leverage to range between 4.0x and 4.5x over the short- to medium-term and while ODH’s contracts with Pemex remain in place. During 2015, ODH’s consolidated leverage was 4.5x. As of Dec. 31, 2015, total debt was USD1.3 billion, down slightly from USD1.4 billion at year-end 2014, and EBITDA for the year was approximately USD287 million, down from USD359 million in 2014.

KEY ASSUMPTIONS

Fitch’s key assumptions within our rating cases for ODH include:

–Brent and West Texas Intermediate (WTI) oil prices average USD35/barrel in 2016 and trend toward a longer-term price of USD65/barrel;

–After expiration of the contracts for its drilling rigs, ODH may face difficulties re-contracting its assets;

–Regular maintenance capex of approximately $90 million during the next five years;

–No dividend payments forecasted.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

–Through-the-cycle consolidated debt/EBITDA of 5x or above on a sustained basis;

–Contracts are not rolled over within six months of expiration or contracted day rates experience further pressure and are significantly lower than current market day rates.

No positive rating actions are currently contemplated over the near term given the weak offshore oilfield services outlook.

LIQUIDITY

ODH’s liquidity position is supported by the company’s stable and predictable cash flow generation coupled with a lengthened debt maturity profile. ODH’s liquidity position is further supported by its cash on hand, which as of Dec. 31, 2015, was approximately USD90 million. The company also maintains a one-year interest reserve account for the 2020 notes and La Muralla IV in an amount equal to USD106.2 million. This compares with the company’s short-term debt of USD105 million.

FULL LIST OF RATING ACTIONS

Fitch has downgraded ODH’s ratings as follows:

–LT Foreign and local currency IDRs to ‘B-‘ from ‘B+’; Negative Outlook;

–Senior secured notes to ‘B-‘/’RR4’ from ‘BB-‘/’RR3’.

Date of Relevant Rating Committee: May 3, 2016

Additional information is available at www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004001

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004001

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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