-- U.S.-based marine services company SEACOR Holdings Inc.’s operating performance and credit protection measures have been below expectations and we expect them to remain weak for the rating over the near term.
-- We are lowering all of our ratings on SEACOR, including the corporate credit rating, to ‘BB’ from ‘BB+’
-- The negative outlook reflects the potential that we could lower the rating if the total debt/EBITDA ratio stays above 3.75x.
On Sept. 6, 2012, Standard & Poor’s Ratings Services lowered its corporate credit rating on New York City-based SEACOR Holdings Inc. (SEACOR) to ‘BB’ from ‘BB+'. The outlook is negative.
At the same time, we lowered the issue rating on SEACOR’s senior unsecured debt to ‘BB’ (the same as the corporate credit rating) from ‘BB+'. The recovery rating on this debt remains ‘3’, indicating our expectation of meaningful (50% to 70%) recovery in the event of a default.
The downgrade reflects our view that the weaker-than-expected operating performance will continue for at least several quarters, despite rebounding activity in the Gulf of Mexico (GoM). SEACOR’s last 12 month (LTM) leverage as of June 30, 2012, was high at 3.9x. Although we expect to see improvement going forward, annualized leverage, inclusive of recent acquisitions, for the second quarter ended June 30, 2012 was a very aggressive 5.5x.
Performance in the company’s core Offshore Marine Services segment (OMS) was very soft in the second quarter, with overall day rates (excluding newly acquired wind farm utility and liftboats) down nearly 15% from the first quarter and essentially unchanged from the prior year. Without the contribution from the recent liftboat acquisition, overall pretax income (which includes gains on asset sales), would have been negative $11 million. This performance contrasts with rated peers, such as Gulfmark and Hornbeck, who are benefiting from the recovery in the GoM. SEACOR’s anchor handling and towing division was weak in the second quarter, and we think performance will remain soft in the second half of the year, given our expectation that rig movements within the GoM are unlikely to increase until at least 2013. Drought in the Midwest has also exacerbated recent weak financial performance, affecting tonnage shipped for its Inland River Services division.
We forecast that SEACOR’s leverage could average in the mid-3x level over the next several years, which we consider to be appropriate for the ‘BB’ rating. However, our negative outlook reflects the possibility that if OMS margins do not improve to at least 25% (it was below 15% in the second quarter), a threshold we believe is necessary to maintain leverage under 3.75x, we could lower the rating to ‘BB-'.
The ratings on SEACOR reflect our view of the company’s “fair” business risk and “intermediate” financial risk. The ratings also incorporate the company’s diversified business profile as an operator of marine and aviation vessels serving the offshore oil and gas exploration and production (E&P) and oilfield services industries, its position in dry bulk inland barges, and its “strong” liquidity position. The ratings also reflect the company’s currently aggressive leverage measures and its exposure to the volatile marine services business.
SEACOR’s intermediate financial risk profile reflects its debt balance on June 30, 2012, of approximately $1.2 billion, inclusive of operating leases. The financial risk profile benefits primarily from SEACOR’s strong liquidity position. Current liquidity, inclusive of balance sheet cash, availability on its credit facilities at SEACOR Holdings and at Era Aviation, and construction reserve funds (these funds are earmarked to acquire U.S.-flag vessels, but can be utilized for other liquidity needs) is approximately $850 million. The strong liquidity incorporates the potential that SEACOR could use cash flows from future acquisitions to delever.
We project that EBITDA in the second half of 2012 will be slightly more than $130 million and that EBITDA could approximate $350 million in 2013. At these levels, we envision that leverage will be in the low 4x area over the second half of 2012 and that it will be in the mid 3x area in 2013. We project that funds from operations will total roughly $100 million for the remainder of 2012 and nearly $250 million in 2013. Based on our expectation that capital spending could be close to $100 million in the second half of 2012 and that it will be slightly above $100 million in all of 2013, we think cash generation will be flat to slightly positive for the remainder of this year and that free operating cash flow will be between $100 million and $150 million in 2013.
Our forecast includes the following assumptions and expectations:
-- We have assumed that OMS day rates, inclusive of wind farm utility and liftboat vessels, will average approximately $10,410 for the remainder of 2012 (the same level as through the first six months). We have assumed that day rates will increase 3% in 2013. We have assumed that utilization will average about 75% in 2012 and 80% in 2013 (first half 2012 utilization was near 80%). We forecast that EBITDA margin will average about 16% in 2012 and 27% in 2013.
-- We have assumed that Aviation revenues will grow at nearly 5% annually and that EBITDA margin will be in the low to mid 20% range. At this level, we forecast Aviation EBITDA next year will be nearly $75 million.
-- We have assumed a 3% annual revenue growth rate for all other segments. We have assumed that Inland River Services’ EBITDA margin will be 28% in 2013 and that other segments will contribute 22% EBITDA margin. We have assumed negligible EBITDA contribution from SEACOR’s trading business.
-- We have not forecast any acquisitions or divestitures for the remainder of 2012 or 2013.
-- Our projection assumes that SEACOR will refinance the nearly $180 million of 5.875% notes that mature in October 2012.
SEACOR’s fair business profile reflects its position as an operator of vessels serving the volatile offshore exploration and production and oilfield services industries. SEACOR’s marine services division (which has historically represented roughly half of EBITDA) has a diversified fleet of nearly 150 owned and operated vessels, and we consider performance to be closely linked to the pace of oil and gas prices. Historically, approximately 50% of revenues and EBITDA in the offshore segment has come from the U.S. GoM, and we forecast that profitability and credit protection measures will depend partly on rig movements into and around the GoM, which can be volatile. Nevertheless, we forecast that rig movements will be soft for the remainder of 2012 but increase in 2013 due to greater capital spending in the GoM. SEACOR’s aviation business has been its highest growth business over the last several years, and while roughly 60% of second-quarter revenues were tied to GoM, flight hours tend to be related to more stable production and pipeline activities.
SEACOR has several lines of business that are less correlated with oil and gas prices, although they are relatively modest contributors to earnings and cash flows. Its inland barge segment, which has historically represented roughly 15% of EBITDA, tends to experience boom-and-bust cycles but correlates more closely with grain and coal transportation. Performance in this segment in 2012 has suffered due to drought conditions in much of the mid-west, resulting in poor river conditions to transport barge freight. SEACOR also has a trading operation in which it arranges for physical delivery of various commodities. Nevertheless, profitability in this business has been fairly modest to this point, and we do not think that it will drive profitability or credit measures going forward.
We consider SEACOR’s liquidity profile to be strong, reflecting the following expectations and assumptions:
-- Liquidity on June 30, 2012, was slightly more than $850 million, inclusive of about $300 million of unrestricted cash on the balance sheet, nearly $280 million of availability on its $405 million revolver (commitments on the revolver will reduce by $40.5 million on Nov. 3, 2012), and approximately $190 million of construction reserve funds. SEACOR also has a separate $350 million five-year credit facility for its ERA Aviation segment, of which approximately $90 million was available on June 30, 2012.
-- We expect that sources of liquidity will be greater than uses by at least 1.5x over the next 12 months and that sources of liquidity minus uses will remain positive even if EBITDA declines by 30%.
-- We believe that SEACOR could absorb a high-impact, low probability event without the need to refinance. We consider SEACOR to have a well-established and solid relationship with its banks.
-- Our assessment of the liquidity profile incorporates our forecast that over the next 12 months, SEACOR will generate approximately $225 million of FFO. We forecast that capital spending through the first half of 2013 will be between $125 million and $150 million, resulting in positive free cash flow over the next 12 months of $75 million to $100 million.
-- The company’s willingness to fund a portion of spending by selling older or less sophisticated assets further supports liquidity. Nevertheless, cash flows could fluctuate because we expect SEACOR to remain an aggressive buyer and seller of assets.
For the full recovery analysis, please see Standard & Poor’s recovery report on SEACOR published on July 24, 2012, on RatingsDirect.
The negative outlook reflects the potential that we could lower ratings if SEACOR’s run-rate leverage is likely to exceed 3.75x, a level that we believe could occur if OMS EBITDA margins fail to increase above 25%. We could foresee this scenario if rig movements into and around the GoM do not improve in 2013, if newer supply vessels entering the GoM result in lower day rates and utilization for SEACOR’s vessels, or if SEACOR experiences higher operating expenses and is unable to pass through these costs to customers. A revision to stable will require run rate leverage of at least 3.75x, which we believe could occur if OMS margins are likely to exceed 25%. We expect that we will either stabilize the rating or lower the rating within the next year.
Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009.
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Corporate Ratings Criteria 2008, published April 15, 2008.
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List Downgraded; Outlook Negative
SEACOR Holdings Inc.
Corporate Credit Rating BB/Negative/-- BB+/Stable/--
SEACOR Holdings Inc.
Senior Unsecured BB BB+
Recovery Rating 3 3
Seabulk International Inc.
Senior Unsecured BB BB+
Recovery Rating 3 3