Reuters: Mergers News: TEXT-S&P revises Vantage Drilling outlook to positive

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TEXT-S&P revises Vantage Drilling outlook to positive Mar 30th 2012, 15:19 Fri Mar 30, 2012 11:19am EDT March 30 - Overview -- U.S.-based Vantage Drilling has acquired the Dragonquest drillship, which is scheduled to begin an eight-year contract with Petrobras later this year. -- Vantage is issuing $775 million of add-on notes through its wholly owned subsidiary Offshore Group Investment Ltd. to fund this acquisition. -- We are revising our outlook on Vantage to positive from stable and affirming our 'B-' corporate credit and senior secured debt ratings. -- The positive outlook reflects our expectation that the Dragonquest contract will improve cash flow visibility and buffer any unexpected downtime associated with its other vessels. Rating Action On March 30, 2012, Standard & Poor's Ratings Services revised its outlook on Vantage Drilling Co. (Vantage) to positive from stable. We affirmed the 'B-' corporate credit rating on the company. The issue-level rating on the senior secured notes will remain 'B-' (the same as the corporate credit rating) following the proposed $775 million tack-on to its existing $1.225 billion 11.5% notes due 2015. The recovery rating is '3' indicating our expectation of meaningful (50% to 70%) recovery in the event of a payment default. The notes will be issued by Offshore Group Investment Ltd., which is a wholly owned subsidiary of Vantage (Vantage guarantees the notes). Vantage is using the add-on notes to fund the purchase and remaining constructing payments associated with the Dragonquest drillship, which will be delivered in April and is likely to start its eight-year contract with Petrobras by September 2012. Rationale The outlook revision reflects our view that the addition of the Dragonquest drillship will improve Vantage's credit risk profile because the eight-year contract provides good cash flow visibility. It also buffers downtime risk associated with its other drillship, the Platinum Explorer, which currently contributes a majority of earnings and cash flows to service debt. We are also revising the outlook because we expect that Vantage's performance will benefit from strengthening contract renewal day rates for high-specification drillships and jackup rigs. Bid rates have improved, to the mid-$500,000 to low-$600,000 range for new and highly sophisticated drillships and to approximately $160,000 for high spec jackups. This bodes well for the Tungsten Explorer drillship, which is currently being constructed and scheduled to begin operations in mid-2013 (we expect a contract announcement later this year). Most of its jackup fleet is contracted through 2012, meaning that 2013 contracts should benefit from the improving day rate trend. The ratings on Houston-based offshore drilling company Vantage Drilling Co. (Vantage) reflect the company's aggressive debt leverage, less-than-adequate liquidity, and participation in the highly cyclical and competitive offshore contract drilling industry. The ratings also reflect Vantage's relatively young and technologically sophisticated fleet and its decent backlog, especially from its drillships. We consider Vantage's financial risk to be "highly leveraged". Pro forma debt as of Dec. 31, 2011 was very high at $2.1 billion (including Standard & Poor's adjustments for operating leases and accrued interest), resulting in aggressive pro forma leverage of more than 6x assuming a full-year of operation from the Dragonquest. To forecast its credit protection measures, we have used relatively conservative assumptions, including a $550,000 day rate for the Tungsten Explorer drillship and jackup day rates that average approximately $145,000. We have also assumed 90% utilization on its vessels and operating and maintenance expense on its drillship and jackups that average 40% and 55% of revenues, respectively. The Dragonquest is scheduled to begin operating for Petrobras in September at a day rate of approximately $550,000 inclusive of bonuses. At this rate, and assuming at least 95% utilization and a 60% to 70% EBITDA margin, we project that the Dragonquest could contribute between $130 million and $150 million of EBITDA annually. Under these assumptions, we project that Vantage will generate more than $400 million of annual EBITDA, corresponding to adjusted leverage in the mid to high 5x area. We project that free operating cash flow could average in the low $100 million range, assuming $15 million of maintenance capital spending and approximately $270 million of cash interest (including projected financing on the Tungsten Explorer). Vantage's vulnerable business risk profile incorporates its limited operating diversity. It competes against some of the largest drillers in the industry, and its small fleet size and scale leaves it vulnerable to competitive pressures including relatively weaker day rates. We expect Vantage to continue to operate in what we consider to be politically unstable regions (it currently operates in West Africa and Malaysia), and we foresee that it will remain vulnerable to geopolitical unrest. Liquidity Vantage's liquidity profile is "less than adequate", incorporating the following expectations and assumptions: -- As of Dec. 31, 2011, Vantage had $110 million in cash and equivalents. The company does not maintain a revolving credit facility. -- Fixed expenses are substantial, with about $225 million of projected cash interest expense per year pro forma for the add-on notes. -- Capital spending is minimal, approximately $15 million per year. -- We envision FFO of approximately $130 million, with free cash flow in the low $100 million area assuming a full year contribution from the Dragonquest and Tungsten Explorer. -- We do not believe that Vantage has the ability to absorb a high-impact, low-probability event without the need for refinancing. Recovery analysis The issue-level rating on Vantage's senior secured debt is 'B-' (the same as the corporate credit rating) and the recovery rating is '3', which indicates our expectation for meaningful (50% to 70%) recovery in the event of a payment default. For the full recovery analysis, please see Standard & Poor's recovery report on Vantage Drilling Co. to be published on RatingsDirect on the Global Credit Portal following the release of this report. Outlook The positive outlook reflects our expectation that we could upgrade the corporate credit rating to 'B' later this year. An upgrade is likely if the Dragonquest begins operating for Petrobras by September. An upgrade to 'B' assumes that demand for Vantage's high-specification jackups and Tungsten Explorer drillship will continue to be strong, with full year pro forma leverage in the mid to high 5x area. A revision of the outlook to stable could occur if the Dragonquest experiences significant mobilization issues that delay the start date with Petrobras or if Vantage encounters material unplanned downtime on its Platinum Explorer drillship. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011. -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009. Ratings List Ratings Affirmed; Outlook Revised To From Vantage Drilling Co. Corporate Credit Rating B-/Positive/-- B-/Stable/-- Ratings Affirmed Offshore Group Investment Ltd. Senior Secured B- Recovery Rating 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Link this Share this Digg this Email Reprints

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