TEXT-S&P: Geokinetics Holdings ratings cut to 'D'
Overview -- U.S.-based seismic services company Geokinetics Holdings Inc. failed to make a $14.6 million interest payment due Dec. 15, 2012 on its 9.75% senior secured notes. -- Although it is operating under a 30-day grace period to make its interest payment, we consider the grace period for interest payment as tantamount to default if the payment is not cured within five business days after the initially scheduled due date. -- We are lowering our corporate credit rating on Geokinetics and our issue-level rating on the company's senior secured notes to 'D' from 'CCC-'. Rating Action On Dec. 18, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Geokinetics Holdings Inc. to 'D' from 'CCC-'. We also lowered our issue-level rating on its senior secured notes to 'D' from 'CCC-'. The recovery rating on the notes remains unchanged at '4', reflecting our expectation for average recovery (30% to 50%) under a payment default. Rationale The rating action follows Geokinetics' announcement on Dec. 17, 2012 that it missed its interest payment on its 9.75% senior secured notes due in 2014. Although it is operating under a 30-day grace period to make its interest payment, we consider the grace period for interest payment as tantamount to default if the payment is not cured within five business days after the initially scheduled due date. Given the company's very weak liquidity, we believe it is unlikely that the company will make its payment within the five-day window. The company intends to restructure its capital structure during the grace period, which expires Jan. 14, 2013. It currently contemplates that under this restructuring, it could convert some or all of its existing notes for common equity and that it will extinguish its existing preferred stock for cash, common equity, and warrants. If the company fails to restructure within the 30-day grace period, it will attempt to enter into a forbearance agreement with its noteholders in order to continue negotiating a restructured capital structure. If the interest payment is not cured during the 30-day grace period, or forbearance is not mutually agreed upon, holders of at least 25% in aggregate principal amount of the outstanding senior secured notes may declare all notes to be due and payable immediately. In addition, the company's Whitebox Credit Facility, which, as of Sept. 30, 2012, was fully drawn at $50 million, will be accelerated and become due and payable immediately. As of Sept. 30, 2012, Geokinetics had $350 million of funded debt. The ratings on Geokinetics reflect our assessment of its "vulnerable" business risk and "highly leveraged" financial risk. Geokinetics is in distress because of its very weak liquidity, which was approximately $22 million on Sept. 30 (excluding prefunded multiclient investments, which are not available for current obligations). At the same time, the company has onerous spending requirements that include nearly $40 million of annual cash interest and $20 million of maintenance capital spending. Additional stress comes from its poor margins relative to rated peers, aggressive credit protection measures, the cancellable and deferrable nature of its contracts, and uncertain potential liability related to the Trinity II Liftboat incident. The seismic data industry is extremely volatile and challenging because it is subject to high competition and weak pricing during exploration and production industry downturns. Recovery analysis For the full recovery analysis, see our recovery report on Geokinetics to be published after this release on RatingsDirect. Related Criteria And Research General Criteria: Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009. Ratings List Downgraded To Default To From Geokinetics Holdings Inc. Corporate Credit Rating D/-- CCC-/Negative/-- Geokinetics Inc. Senior Secured D CCC- Recovery Rating 4 4 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.