Fitch Assigns First-Time Rating of 'B+' to Transocean Proteus; Outlook Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned ratings to Transocean Proteus Limited (Proteus), a wholly-owned subsidiary of Transocean, Inc. Fitch rates Proteus' Long-Term Issuer Default Rating (IDR) 'B+' and senior secured notes 'BB-'/'RR3'.

The Rating Outlook is Negative.

The secured debt rating considers the structural seniority of the notes given the lien on the Deepwater Proteus and certain other assets related to the rig, as well as guarantees by Transocean Ltd., Transocean Inc., and a wholly-owned indirect subsidiary that owns the Deepwater Proteus, an ultra-deepwater (UDW) drillship operating under a 10-year contract with a subsidiary of Royal Dutch Shell ('AA-'/Outlook Negative). Issuance of the senior secured notes at Proteus will unfavorably impact recoveries for Transocean Inc. unsecured debt, but the existing unsecured recovery ratings have sufficient headroom. Fitch views the guarantee as an additional payment support that is essentially a payment put to the extent the Deepwater Proteus' contracted cash flows are insufficient to repay the secured notes. The supportive contract features, strong operating history, and favorable contract performance history between Transocean and Shell provide a level of confidence in the ability of Proteus to independently meet its debt service requirements. However, risks related to contract performance and renegotiation remain.

KEY RATING DRIVERS

Transocean's ratings are supported by its market position as one of the largest global offshore drillers with a strong backlog ($12.2 billion as of Oct. 24, 2016) and floater-focused rig fleet largely contracted with financially stronger international oil companies. The company's high-grading and margin improvement efforts and adequate near-term financial flexibility, including that afforded by the deferral of approximately $1.2 billion in uncontracted newbuild capex payments until 2020, also support the rating. These considerations are offset by the company's continued need to generate and conserve liquidity given the weak offshore rig market outlook, unfavorable capital market conditions, heightened maturities profile, and contracted newbuild capex commitments.

Fitch views management's proactive financial management as favorable. While the recent secured and unsecured guaranteed issuances structurally subordinate the existing unsecured notes, the proceeds have been and are anticipated to be used to help improve the company's maturity and liquidity profiles during a challenged offshore drilling cycle. Further, debt maturity management actions should also help alleviate bank concerns heading into credit facility negotiations over the next couple of years.

Fitch believes the company's current and near-term leverage profiles are consistent with a higher rating (Fitch calculated year-ended 2015 and September 2016 latest 12 months [LTM] debt/EBITDA of 1.9x and 2.5x, respectively). However, Fitch forecasts leverage metrics could exceed through-the-cycle levels over the rating horizon as current contract coverage declines meaningfully in 2017 with re-contracting risk elevated in a very weak market environment.

NEAR NEUTRAL FCF PROFILE; LEVERAGE METRICS RISING

Fitch's base case projects that Transocean, excluding cash flows to non-controlling interests, will have a near neutral free cash flow (FCF) profile in 2016 and 2017. Fitch's base case results in consolidated debt/EBITDA, excluding cash-collateralized Eksportfinans loans, of 4.6x and 6.2x in 2016 and 2017, respectively. Fitch recognizes that the secured notes at Proteus, as well as any potential future secured note issuance, structurally subordinate contracted cash flows available to service corporate debt and believes that adjusted corporate leverage metrics, excluding rig secured debt and associated cash flows, could rise above consolidated Transocean metrics.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Transocean include:

--Brent oil price that trends up from $44/barrel in 2016 to a longer-term price of $65/barrel;

--Current contracted backlog is forecast to remain intact with no material renegotiations;

--Market day rates assumed to be $275,000 for higher-specification UDW rigs with other rig classes seeing similarly steep price discounts;

--Fleet composition considers announced rig retirements and attempts to adjust for uncompetitive rigs due to their technological obsolescence, undifferentiated market position, or cost-prohibitive through-the-cycle economics;

--Capital expenditures consistent with company guidance of approximately $1.4 billion and $600 million in 2016 and 2017, respectively, with spending levels thereafter largely based on maintenance capital levels and the current newbuild delivery schedule;

--Equity-funded acquisition of Transocean Partners LLC (NYSE: RIGP) assumed to close in Q4 2016.

RATING SENSITIVITIES

Positive: No positive rating actions are currently contemplated over the near term given the weak offshore oilfield services outlook. However, future developments that may, individually or collectively, lead to a positive rating action include:

For an upgrade to 'BB-':

--Demonstrated commitment by management to lower gross debt levels;

--Mid-cycle debt/EBITDA of below 5.0x on a sustained basis;

--Further progress in implementing the company's asset strategy to focus on the high-specification and UDW markets.

To resolve the Negative Outlook at 'B+':

--Demonstrated ability to secure tenders that constructively contribute to the backlog and cash flows signalling the company's ability to manage the industry's re-contracting risk and bridge its financial profile through-the-cycle;

--Continued progress towards management's 2018 liquidity range of $3.6 billion-$4.1 billion, while repaying scheduled maturities;

--Mid-cycle debt/EBITDA of 5.0x-5.5x on a sustained basis.

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

--Failure to manage FCF, repay near-term maturities, and retain adequate liquidity over the next few years;

--Additional issuance of secured debt that structurally subordinates contracted newbuild cash flows resulting in materially lower corporate cash flows;

--Material, sustained declines in rig utilization and day rates signalling a heightened level of re-contracting and recovery risk;

--Mid-cycle debt/EBITDA around 6.0x on a sustained basis.

ADEQUATE NEAR-TERM LIQUIDITY POSITION

Transocean had cash and equivalents of approximately $2.5 billion, including the senior unsecured guaranteed issuance and debt tender, as of Sept. 30, 2016. The company also had approximately $366 million in restricted cash investments associated with the required cash collateralization of the outstanding Eksportfinans loans and other contingent obligations. Supplemental liquidity is provided by the company's $3 billion senior unsecured revolving credit facility due June 2019, including a $1 billion sublimit for letters of credit. As of Sept. 30, 2016, the company had $3 billion in available borrowing capacity on this facility, leading to total liquidity of approximately $5.5 billion.

HEIGHTENED MATURITIES PROFILE

Transocean has annual senior notes maturities equal to approximately $938 million, $505 million, and $965 million between 2016 and 2018. These represent the company's 5.05% senior notes due Dec. 15, 2016, 2.5% senior notes due October 2017, 6% senior notes due March 2018, and 7.375% senior notes due April 2018. This excludes Eksportfinans principal amortization that is cash-collateralized.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

Transocean Proteus Limited

--Long-Term IDR 'B+';

--Senior secured notes 'BB-'/RR3.

The Rating Outlook is Negative.

Additional information is available on www.fitchratings.com.

Summary of Financial Statement Adjustments

Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)

https://www.fitchratings.com/site/re/886557

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016)

https://www.fitchratings.com/site/re/890199

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016210

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016210

Endorsement Policy

https://www.fitchratings.com/regulatory

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Source: Fitch Ratings

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