Moody’s Investors Service, (“Moody’s”) has today taken a number of rating actions on Topaz Energy and Marine Limited (“Topaz”) and Topaz Marine S.A. (“Topaz Marine”). Moody’s confirmed Topaz’s B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating (PDR). In parallel, Moody’s confirmed Topaz Marine’s B3 senior unsecured notes rating. The outlook on all ratings changed to negative. This concludes the rating review initiated on January 22nd 2016.
“The confirmation of Topaz’s ratings reflects the company’s resilience in the offshore oilfield service industry which has been under pressure following the oil price drop by more than 70 per cent over the last 18 months”, says Julien Haddad, a Moody’s Analyst. “This resilience is driven by Topaz’s leading position in the Caspian Sea benefitting from high barriers to entry; the company’s exposure to basins where oil production levels have not decreased; as well as its capacity to renew some of its existing contracts, albeit at lower day rates.”
RATINGS RATIONALE
Oil prices have dropped by more than 70 per cent over the last 18 months reflecting continued oversupply in the global oil markets, very high inventory levels and additional Iranian oil exports coming on line. Moody’s lowered its oil price estimates on January 21st 2016 and assume Brent prices to average $33 in 2016 and $38 in 2017, with a slow recovery for oil prices over the next several years.
Moody’s expects that offshore oilfield service providers will face an extremely challenging operating environment through at least 2018. The significantly lower oil and gas prices forcing major National Oil Companies (NOCs) and Integrated Oil Companies (IOCs) to reduce operating expenditures translates into severe pressure on day rates and utilization, which will result in weaker cash flow and liquidity. This, coupled with limited capital market access, and reduced fleet value will deter the ability of companies to de-leverage.
Topaz’s B2 ratings reflect (1) the company’s leading market position in the Caspian Sea where it benefits from high barriers to entry; (2) its healthy operating backlog with key NOCs and IOCs supported by a capacity to renew existing contracts and lengthen their tenure in a period of low oil prices, albeit at lower day rates; (3) a longstanding relationship with its customers; and (4) Topaz’s ability to reduce its operating costs to adapt to a lower day rate environment. On March 04 2016, Topaz said that it had signed a long-term contract with BP Exploration (Caspian Sea)
Limited (unrated), a unit of BP p.l.c. (A2 on review for downgrade), to supply 14 offshore support vessels in Azerbaijan, increasing the company’s global revenue backlog to $1.4 billion. The agreement extends existing contracts for the vessels until 2023, including all options.
The B2 CFR also takes into account the company’s strong liquidity position underpinned by a $50 million cash balance as of September 2015 and an undrawn committed $100 RCF, with no major debt maturing before November 2018.
The B2 ratings also reflect Topaz’s small operational scale and a number of concentration risks (including geographic, customer and product offering) with more than 80% of total revenues being derived from the Caspian and MENA regions, half of total revenues from its top four customers, and business operations limited to a single niche industry.
Moody’s expects lower utilisation and day rates to negatively impact EBITDA generation resulting in net Debt to EBITDA (excluding shareholder loans) increasing to 4.0x in 2018 in line with the 4.0x threshold for that period, leaving limited headroom on this leverage covenant. Furthermore, lower day rates could result in Topaz recording an impairment because of lower expected revenue, which would in turn reduce the headroom on the company’s minimum $500 million tangible net worth covenant from the current 25 per cent as of September 2015.
The rating agency notes though that Topaz has a track record of successfully negotiating its covenant thresholds. For example, in April 2015, Topaz successfully refinanced its various term loans with one $350 million amortizing secured facility due in April 2022. This allowed the company to renegotiate its financial covenant thresholds, resulting in the company having comfortable headroom.
The B3 rating on the $350 million senior unsecured notes due in November 2018 reflects the high level of secured debt in the capital structure and incorporates contractual and structural subordination considerations which we believe will cause the unsecured bondholders to have lower recovery rates relative to secured creditors in case of a debt default. The notching also reflects the significant restrictions in enforcement of the upstream guarantees that are provided by certain subsidiary guarantors.
