Fitch Ratings has downgraded the Issuer Default Rating (IDR) and senior unsecured ratings for Noble Corp. (Noble; NYSE: NE) from 'A-' to 'BBB+'. The Rating Outlook remains Negative. A complete list of rating actions follows at the end of this release.
The downgrade is a result of the increased aggressiveness in the company's newbuild program and increasing certainty that Noble will not, in the near term, return to leverage levels previously identified by Fitch as consistent with retaining the 'A-' rating (2.0x debt/EBITDA).
The Negative Outlook reflects the continuing industry recovery from the impacts of the post-Macondo environment, including higher levels of fleet downtime, higher debt levels, and increased capex expectations, all of which Fitch anticipates will extend the current period of weak credit metrics for the company.
Looking forward, Fitch expects Noble will generate negative free cash flow (FCF) in 2012 and 2013 due to its expanded newbuild capital expenditures combined with operating cash flows that are continuing to recover from depressed levels.
An inability to reduce leverage below 2.5 times (x) over the next 12 to 24 months would be a catalyst for a downgrade from current rating levels. This could result from continued weak market conditions in the U.S. GoM, or from unanticipated operational issues. Other catalysts for a downgrade could stem from unfavorable contract renegotiations which pressure EBITDA and cash flows or the potential for further newbuild announcements.
Noble's credit profile continues to be supported by the high quality of the company's fleet and expanding presence in the ultradeepwater market. Improvements in the company's fleet profile stem from delivery of previously announced newbuilds, the company's 2010 acquisition of FDR Holdings Limited (Frontier) and as a result of the additions to the newbuild program in 2011. Noble also continues to benefit from operational and geographical diversification, high margin levels, management's strong cost control focus, a robust $12.8 billion contract revenue backlog (as of Sept. 30) and the company's strong safety record.
Longer-term risks to Noble's credit profile stem primarily from the risk of weaker industry conditions (particularly as a result of the increased supply of speculative newbuilds), and the potential for additional debt to fund acquisitions, asset purchases or shareholder friendly activities.
A key risk for the sector remains falling oil prices. Oil prices rallied in early 2011 and remain elevated compared to three to five year averages of $80 per barrel. Based on the current global supply/demand fundamentals, Fitch believes prices have room to pull back from current levels which could result in reduced drilling activity. Additionally, natural gas prices remain extremely depressed in North America, and are not expected to increase dramatically in the near term.
For the LTM period ending Sept. 30, 2011, Noble generated EBITDA of $1.07 billion, a decrease of more than 25% over the year ended Dec. 31, 2010, while debt balances increased by over $1 billion to end the period at $3.81 billion. Credit metrics weakened as a result, with LTM debt-to-EBITDA of 3.6x and interest coverage of 6.3x. FCF was negative ($1.7 billion) as a result of weak operating cash flows and high capital expenditures resulting from the increased newbuild program. Capital expenditures are expected to remain elevated in 2012, though the completion of three newbuild drillships in 2011 should have a mitigating effect.
Noble maintains liquidity from cash and equivalents ($197 million at Sept. 30, 2011), its two $600 million credit facilities (combined $475 million available at Sept. 30, 2011) and operating cash flows ($843.3 million for the LTM period). Noble has no debt maturities until the June 2013 maturity of the company's 5.875% senior notes. The first of the company's two $600 million senior unsecured credit facilities matures in March 2013. The company's only financial covenant is a 60% limit on maximum debt-to-total tangible capitalization which is in both its senior unsecured credit facilities. Limitations on additional liens are restricted to a maximum of 10% of consolidated tangible net worth. None of the company's senior unsecured notes contain financial covenants.
Fitch has downgraded Noble's ratings as follows:
--IDR on Noble Corp. (Cayman Islands) from 'A-' to 'BBB+';
--Senior unsecured revolving credit facilities from 'A-' to 'BBB+';
--Senior unsecured notes and debentures from 'A-' to 'BBB+'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' dated Aug. 12, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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