-- U.K.-based oil exploration and production company Afren PLC has
launched a proposed secured notes issue.
-- We understand that Afren will use the proceeds to refinance its
existing Kurdistan acquisition facility.
-- We are assigning our 'B' issue rating to the proposed secured notes,
in line with our 'B' long-term corporate credit rating on Afren.
Feb 21 - Standard & Poor's Ratings Services said today that it assigned its
'B' issue rating to the proposed issuance of seven-year senior secured notes by
U.K.-based oil exploration and production company Afren PLC
(B/Stable/--). The issue rating is in line with our 'B' long-term corporate
credit rating on Afren and our 'B' issue rating on Afren's existing $500 million
senior secured bond.
The issue rating on the proposed notes is subject to both the successful
issuance and our satisfactory review of the final documentation.
We understand that the company will use the proceeds of the proposed notes to
refinance its existing $200 million acquisition facility, of which $100
million is drawn and $100 million is earmarked for the final payment of last
year's $588 million acquisition of assets in Kurdistan.
The issue rating reflects the following factors:
-- The proposed notes are secured. Our base-case assumption for the
secured notes is that the guarantees and intercompany loans from Afren's
material operating companies are effective and enforceable.
-- The proposed notes rank pari passu with the existing $500 million
senior secured bond.
-- The proposed notes benefit from first-lien security over the Okoro oil
field and second-lien security over the core Ebok oil field, both located off
the Nigerian coast.
-- We believe that contractual and structural priority liabilities,
including operating companies' debt and trade payables, are limited. The
Standard & Poor's-adjusted ratio of priority liabilities to assets was about
15% as of Dec. 31, 2011, using pro forma figures for the proposed issuance.
However, the proposed notes are subordinate to the reserve-based bank line
that is secured on cash flows and reserves of the Ebok oil field (the Ebok
bank line), of which $218 million was outstanding at year-end 2011. Both the
documentation of the proposed notes and that of the existing bond limit
secured priority debt (such as the Ebok bank line) at the greater of $150
million or 20% of total adjusted consolidated net tangible assets. In
addition, priority debt, in the form of the Ebok bank line, represented less
than 1x of 2011 EBITDA.
We assess Afren's business risk profile as "vulnerable." We base our
assessment on the high country risk associated with Afren's operations in the
Federal Republic of Nigeria (B+/Positive/B); Afren's production concentration
in a few oil fields; its modest share of proven reserves that are in
production; and its relatively small production volumes. Risks related to the
oil industry include volatile oil prices, a declining asset base as resources
are exploited, and heavy capital intensity.
Positive rating factors include Afren's good after-tax profitability,
supported by our assumption that any new legislation in Nigeria would not
change this position. Afren's focus on oil, instead of gas, and its midsize
resource base are further strengths. We also believe that oil prices will
remain high in 2012, with Brent crude at $90 per barrel in our baseline
We assess Afren's financial risk profile as "aggressive" due to its active and
principally net-debt-funded approach to acquisitions, continued large capital
spending needs to develop reserves, and high dependence on cash flows from the
Ebok oil field. On the positive side, we forecast that Afren's liquidity
should remain "adequate" under our criteria and that its total financial debt
will decline from the peak we forecast at year-end 2011.
RELATED CRITERIA AND RESEARCH
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas
Exploration And Production Industry, Jan. 20, 2012
-- Natural Gas Price Assumptions for 2012 and 2013 Revised; 2014 Oil and
Natural Gas Assumptions Added, Nov. 16, 2011
-- Methodology and Assumptions: Liquidity Descriptors for Global
Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Senior Secured Debt B
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
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column. Alternatively, call one of the following Standard & Poor's numbers:
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