In our current base-case forecast we assume that fully adjusted EBITDA (adjusted for capitalized multi-client spending) will improve to almost $700 million in 2012 and that the consolidated entity will achieve $900 million in revenue in 2013. We also anticipate an increase in the EBITDA margin due to a cost-reduction program taking full effect and modest synergies from the acquisition. We expect that debt will remain elevated in 2013 at around $2.8 billion (fully adjusted) and anticipate that free operating cash flow (FOCF) will remain modestly positive.
We note that CGGV's current credit metrics are weak for the rating. However, we forecast an improvement in the company's credit metrics on the back of our assumption that industry conditions will also improve in the next few quarters.
The issue rating on CGGV's senior secured revolving credit facilities is 'BB', one notch above the corporate credit rating. The recovery rating on this debt is '2', indicating our expectation of substantial (70%-90%) recovery in an event of payment default. We estimate recovery at the low end of this range.
The issue ratings on CGGV's unsecured notes, including $350 million 9.5% notes due 2016, $400 million 7.75% callable notes due 2017, and $650 million 6.5% notes due 2021, are 'BB-', in line with the corporate credit rating. The recovery rating on these instruments is '3', indicating our expectation of meaningful (50%-70%) recovery in an event of payment default.
Our recovery expectations for all of the group's debt instruments are underpinned by our valuation of CGGV as a going concern. We estimate the stressed enterprise value at our simulated point of default in 2016 to be about $2.2 billion. Recovery prospects for the senior secured debt are moderately higher than for the unsecured debt, due to the asset security of the revolving facilities, which is sufficient to elevate recovery prospects for the secured debt into the higher '2' category. Nevertheless, a portion of the claims on the secured debt would effectively rank pari passu with the unsecured notes, once the security value is exhausted in our default scenario. CGGV's substantial asset base also underpins our estimated recovery prospects at default.
We have revised downward our assessment of CGGV's liquidity to "adequate" from "strong", under our criteria, reflecting our expectation that covenant headroom will decrease somewhat after the acquisition and be more in line with an "adequate" assessment. We still anticipate that the ratio of cash sources to cash needs will be around 2x for the next 15 months, and that liquidity will remain positive even if EBITDA falls by 15%. We anticipate that the Fugro acquisition will complete by the end of first-quarter 2013.
Our assessment of sources of liquidity includes:
-- Almost $800 million of cash stemming from $337 million cash available at Sept. 30, 2012, and the issuance of $450 million in convertible bonds, which is dedicated to funding the acquisition. We treat $210 million as tied to operations and thus not available for debt reduction;
-- About $240 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 $850 million year; and
-- Zero or minimal dividend payments.
We forecast that CGGV's headroom under its covenants (net debt to reported EBITDA and interest coverage) will be between 20% and 30% in our base-case scenario, which is commensurate with the "adequate" assessment. We believe the company has managed its liquidity prudently, and we note positively that it has actively managed its maturity profile in the past.
The stable outlook reflects our view that, after the Fugro acquisition, credit metrics will be consistent with our guidance for the ratings. It also assumes that liquidity will be at least "adequate", although the acquisition will somewhat reduce liquidity leeway and covenant headroom.
We believe CGGV's operating performance and credit ratios will continue to improve slightly in the last quarter of 2012, given our assessment that near- to medium-term market prospects will become more favorable.
The rating factors in our anticipation that the group will achieve adjusted FFO to debt above 20% in our base-case scenario and moderate FOCF by mid-year 2013. We note, however, that current credit metrics are below our guideline levels for the rating. We will be monitoring CGGV's performance over the next few quarters.
The rating could come under pressure if credit metrics do not improve from current weak levels and/or if FOCF turns negative. This could come from unfavorable developments in the seismic market or operational issues, for example. We could lower the rating if CGGV's already substantial debt increased further, say as a result of substantial new vessel orders.
Rating upside appears remote, as it would require material debt reduction and improved FOCF, which we do not anticipate in our base-case scenario.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012
Ratings Affirmed; CreditWatch/Outlook Action
Compagnie Generale de Geophysique - Veritas
Corporate Credit Rating BB-/Stable/-- BB-/Watch Neg/--
Senior Secured BB BB/Watch Neg
Recovery Rating 2 2
Senior Unsecured* BB- BB-/Watch Neg
Senior Unsecured BB- BB-/Watch Neg
Recovery Rating 3 3
*Guaranteed by CGG Veritas Services Holding (U.S.) Inc.
CGG Veritas Services Holding (U.S.) Inc.
Senior Secured(4) BB BB/Watch Neg
Recovery Rating 2 2
(4)Guaranteed by Compagnie Generale de Geophysique - Veritas