TEXT-S&P assigns 'B' rtg to Ocean Rig UDW $750 mil. secured notes

Thu Sep 6, 2012 8:15am EDT

Sept 06 - Standard & Poor's Ratings Services said today that it has assigned its 'B' issue rating to the proposed $750 million senior secured notes due 2017 to be issued by Drill Rigs Holding Inc., a subsidiary of offshore drilling company Ocean Rig UDW Inc. (B/Stable/--). The recovery rating on the proposed notes is '3', indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default.

The issue and recovery ratings on the proposed $750 million senior secured notes are subject to final documentation.

At the same time, our recovery rating on the $500 million senior unsecured notes issued by Ocean Rig UDW Inc. remains unchanged at '6', reflecting our expectation of negligible (0%-10%) recovery prospects in an event of default.

The recovery rating on the new notes is underpinned by their first ranking pledge over substantially all the assets of the issuer Drill Rigs Holdings Inc., including the drilling units Eirik Raude and Leiv Eirikson which have a combined book value of $1.2 billion. The notes also benefit from a guarantee from parent company Ocean Rig UDW Inc. and subsidiaries under Drill Rigs Holdings Inc. and a pledge over the shares of the issuer, Drill Rigs Holdings Inc. and of its subsidiaries. The recovery rating is constrained at the '3' level by the uncertain jurisdictional exposure at the point of hypothetical default, as the rigs could be located in countries with weaker insolvency regimes, which could make it difficult to enforce the noteholders' claim on the rigs or the shares of the issuer. We understand that the notes' documentation allows the issuance of only $50 million of additional notes with the benefit of the notes' collateral.

The proceeds of the new notes will be devoted to refinancing the existing $400 million credit facility due 2013 located at Drill Rigs Holdings Inc., which originally financed the construction of rigs Eirik Raude and Leiv Eirikson. The excess proceeds will result in additional corporate liquidity. The recovery ratings on the existing 9.5% senior notes carry a recovery rating of '6' due to the notes' unsecured and unguaranteed nature and the fact that virtually all other group debt is secured by assets, thereby creating contractual and structural subordination for these notes.

In line with our criteria, to determine recoveries, we simulated a hypothetical default scenario. In this scenario, we assumed material delays in finding charters for some of the company's new vessels and much lower rates as certain charters on existing rigs expire. This would lead to difficulty in financing the $1.3 billion remaining capital expenditure for the three seventh-generation hull drillships under construction to be delivered in 2013 and/or for the potential $2 billion financing in 2014 and 2015 if the company exercises its option to build three additional drillships. We assume a default in late 2014 triggered by this financing risk, although recovery prospects would not be substantially affected if the default occurred in 2013. Using a discrete asset valuation, we estimate that, at the point of default, the stressed value of the security that provides the collateral for the notes would be approximately $600 million.

We also assumed administrative costs at 10% and added six months of prepetition interests to the amount of notes outstanding at the point of default. On this basis, we calculate coverage for the new notes at the very high end of the 50%-70% range.

RELATED CRITERIA AND RESEARCH

-- Key Credit Factors: Business And Financial Risks In The Oil And Gas Exploration And Production Industry, Nov. 10, 2008

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009

-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

RATINGS LIST

New Rating

Drill Rigs Holdings Inc.

Senior Secured

US$750 mil nts due 12/31/2017* B

Recovery Rating 3

Ratings Affirmed

Ocean Rig UDW Inc.

Senior Unsecured

Local Currency CCC+

Recovery Rating 6

*Guaranteed by Ocean Rig UDW Inc.

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