Cambodian Business Review - - SNIPPETS -

Her­cules Off­shore, Inc.'s prepack­aged bank­ruptcy filed may be a lead­ing in­di­ca­tor of fur­ther bank­rupt­cies among other chal­lenged high yield (HY) off­shore drillers, ac­cord­ing to Fitch Rat­ings. Her­cules' restruc­tur­ing plan in­volves the con­ver­sion of over $1.2 bil­lion in se­nior notes into 96.9% of the firm's new com­mon eq­uity and es­tab­lish­ment of $450 mil­lion of new debt fi­nanc­ing to fund the de­liv­ery of the com­pany's con­tracted new­build drilling rig, the Her­cules High­lander, and pro­vide liq­uid­ity. The plan also pro­vides cur­rent eq­uity hold­ers with the re­main­ing 3.1% of the new com­mon eq­uity de­spite the debtorasserted go­ing con­cern en­ter­prise value range of $535 mil­lion to $725 mil­lion be­ing be­low full re­cov­ery. The plan is sub­ject to court ap­proval. Her­cules' fil­ing moves the energy trail­ing 12-month (TTM) de­fault rate to 3%, up from 2.5% at the end of July. This and the ex­pected bank­ruptcy of Sam­son Re­sources Corp. will push the energy TTM de­fault rate to 4%, over twice the his­tor­i­cal 1.9% mark. The re­cent oil price drop has com­pounded the ef­fects of the off­shore rig over­sup­ply cy­cle, re­sult­ing in lim­ited ten­ders, weak day rates and legacy fleet ra­tio­nal­iza­tion. Ex­ist­ing back­logs have gen­er­ally in­su­lated off­shore drillers from lower mar­ket ac­tiv­ity and day rates so far. How­ever, back­log pro­tec­tions for off­shore drillers are fall­ing away at a fast clip - a sig­nif­i­cant por­tion roll- off within the next year - which will likely be­gin to pres­sure cash flows. Liq­uid­ity pro­files are mixed, though larger, in­vest­ment- grade off­shore drillers tend to be bet­ter po­si­tioned to bridge the down­cy­cle. Ul­tra- deep­wa­ter rigs have legacy con­tract dayrates gen­er­ally in the high-$400,000 to $600,000 range, but a scarcity of ten­ders over the past sev­eral quar­ters has in­tro­duced un­cer­tainty re­gard­ing mar­ket day rates. Fitch's best guess for short-run mar­ket day rates is around $325,000 for ul­tra­deep­wa­ter rigs. This would prob­a­bly rep­re­sent a 'purge day rate' that dis­in­cen­tivizes un­con­tracted new­build de­liv­er­ies and fa­cil­i­tates legacy fleet ra­tio­nal­iza­tion, lead­ing to an even­tual in­flec­tion point cur­rently an­tic­i­pated to be late 2016/early 2017. Other rig types are an­tic­i­pated to see sim­i­lar day rate re­duc­tions with un­com­pet­i­tive rigs be­ing stacked or scrapped. Fitch ex­pects HY off­shore drillers to be at a con­tract­ing disad­van­tage, rel­a­tive to larger, more es­tab­lished off­shore drillers, due to their smaller size, lim­ited cus­tomer history, and higher coun­ter­party risk. Our view is that cus­tomers may, in most cases, pre­fer the high­est qual­ity as­sets, but are also giv­ing care­ful con­sid­er­a­tion to an op­er­a­tor's size , stay­ing power, ge­o­log­i­cal fa­mil­iar­ity, and his­tor­i­cal op­er­at­ing per­for­mance. This as­sumed con­tract­ing disad­van­tage would greatly re­duce HY off­shore drillers' abil­ity to build a fu­ture back­log in the cur­rent down­turn, rais­ing their prob­a­bil­ity of de­fault. In this con­text, HY off­shore driller re­cov­ery prospects and restruc­tur­ing plans be­gin to come into fo­cus in a hy­po­thet­i­cal de­fault sce­nario. Fitch re­cently re­viewed three HY off­shore drillers - Van­tage Drilling Com­pany, Pa­cific Drilling S. A., and Ocean Rig UDW Inc. - and de­ter­mined that se­cured note­holder had above av­er­age (i.e. greater than 50%) re­cov­ery prospects, while un­se­cured note­hold­ers had poor (i.e. 0%-10%) prospects.

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