TEXT-S&P places CGGV 'BB-' ratings on watch negative
Overview -- France-based oil and gas seismic operator Compagnie Generale de Geophysique - Veritas (CGGV) announced on Sept. 24, 2012 that it will acquire the geoscience division of Netherlands-based company Fugro N.V. for EUR1.2 billion. -- CGGV intends to finance one-third of the overall acquisition price with new equity as soon as possible. The acquisition will be fully cash paid and will likely increase the debt burden on the group at the outset. -- We are therefore placing our 'BB-' long-term corporate credit and issue ratings on CGGV on CreditWatch with negative implications. -- The CreditWatch placement reflects our view that the acquisition could result in a potential meaningful deterioration in credit metrics in the absence of a successful rights issue, which might lead us to lower the rating by one notch. Rating Action On Sept. 25, 2012, Standard and Poor's Ratings Services placed its 'BB-' long-term corporate credit and issue ratings on France-based oil and gas seismic operator Compagnie Generale de Geophysique - Veritas (CGGV) on CreditWatch with negative implications. Rationale The CreditWatch placement follows the announcement by CGGV on Sept. 24, 2012, that it will acquire the geoscience division of Netherlands-based Fugro N.V. (not rated), excluding multi-client library and ocean bottom nodes businesses. The CreditWatch reflects our view that the EUR1.2 billion acquisition, funded by a bridge loan and proceeds from shares in the newly created Seabed joint venture, will increase CGGV's gross debt from an already sizable $1.9 billion at the end of June 2012. As a result, we estimate that credit metrics for 2012 and 2013 will fall short of our previous forecasts of Standard & Poor's-adjusted debt to EBITDA of less than 4x and funds from operations (FFO) to debt of more than 20%. CGGV intends to issue about one-third of the transaction value (about EUR400 million) in equity to partially finance the transaction as soon as market conditions permit. We believe that this could strengthen the group's credit metrics to FFO to debt of about 20%-25% and debt to adjusted EBITDA of about 3.5x. We consider these credit metrics to be commensurate with the current 'BB-' rating. In combination with a liquidity profile that we assess as at least "adequate" this would likely lead to us affirming the rating on completion of the transaction. Nevertheless, the rights issue carries some execution risks related to market conditions and CGGV may not be able to raise as much new equity as planned, or before the acquisition closes. These execution risks, coupled with credit metrics that we consider lower than the levels commensurate with the current rating for an extended period, could lead us to lower the ratings by one notch. We could also consider a downgrade if CGGV's liquidity deteriorates, although we do not anticipate such an occurrence. On the positive side, we believe that although this acquisition will likely not result in us reassessing upward CGGV's business risk profile from "weak" under our criteria, the transaction would likely strengthen the business risk profile somewhat. The increased size of operations of the combined entity, an improved operation margin, and some end-market diversification in less-cyclical market segments would be credit positive. The combined group would have achieved pro forma revenues of $4.2 billion and EBITDA of $1.0 billion in 2011, according to CCGV. Liquidity We assess CGGV's liquidity as "strong" under our criteria, reflecting our expectation that cash sources will cover cash needs by about 2x for the next three years, and that liquidity will remain positive even if EBITDA falls by 30%. After the transaction, we forecast that liquidity will be at least "adequate," as our criteria define the term. Our assessment of sources of liquidity as of June 30, 2012 includes: -- $319 million of cash , of which we treat $190 million as tied to operations and thus not available for debt reduction; -- About $280 million undrawn under two revolving credit facilities due in 2014; and -- Unadjusted FFO before deducting multi-client spending in the range of $650 million-$700 million a year. Our assessment of liquidity needs includes: -- Minimal debt maturities before 2016 when the first major debt matures (a $350 million high-yield note); -- Some working capital outflows; -- Combined industrial capital spending and costs for multi-client investments capitalized at about $700 million year; and -- Zero or minimal dividend payments. In mid-year 2010, CGGV renegotiated its ratio covenants. We note that the new levels allow for adequate headroom in our base-case scenario. We believe the company has managed its liquidity prudently, and we note positively that it has actively managed its maturity profile in the past. We forecast that CGGV's headroom under its covenants (net debt to reported EBITDA) will be 40% or more in our base-case scenario. CreditWatch The CreditWatch placement reflects a one-in-two likelihood that the rating may be lowered as a result of the announced transaction. We aim to resolve the CreditWatch as soon as is feasible, possibly after the announced financing is secured and after a review of the final amount, terms, and features of the financing. We could affirm the long-term corporate and issue ratings if the financing of the acquisition goes ahead as per the company's plan (that is, financing with one-third of equity and two-thirds from debt and proceeds from shares in the Seabed joint venture) while maintaining a liquidity profile of at least "adequate." We consider an FFO-to-debt ratio of more than 20% to be commensurate with the current rating. In contrast, we could lower the long-term corporate and issue ratings by one notch if the group fails to issue equity or if the amount, terms, and features of the financing differ materially from that announced by the company. This could lead to debt to adjusted EBITDA of more than 4x and FFO to debt of less than 20%. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Compagnie Generale de Geophysique - Veritas Corporate Credit Rating BB-/Watch Neg/-- BB-/Stable/-- Senior Secured BB/Watch Neg/-- BB/Stable/-- Recovery Rating 2 2 Senior Unsecured BB-/Watch Neg/-- BB-/Stable/-- Recovery Rating 3 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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