S&P Lowers Outlook on Vantage Drilling (VTG) to Negative; Financial Risk Profile Remains 'Highly Leveraged'

Standard & Poor's Ratings Services said it revised its outlook to negative from stable on Houston-based Vantage Drilling Co. (NYSE: VTG) and affirmed its 'B-' corporate credit rating on the company.

We also affirmed our 'B-' issue-level ratings on the company's senior secured debt. The recovery rating on the debt remains '3', indicating our expectation of meaningful (50% to 70%) recovery in the event of a payment default.

The ratings on Vantage reflect our assessment of the company's "weak" business profile, its "highly leveraged" financial risk profile, and its "adequate" liquidity. Our business profile assessment incorporates the company's limited operating diversity. Vantage has a small fleet compared with rated peers, consisting of three premium ultra-deepwater drillships and four premium jack-ups. Vantage also has one ultra-deepwater drillship (the Cobalt Explorer) that is under construction. However, the company has delayed delivery and final payment of the Cobalt Explorer until the first half of 2016. We expect approximately 70% of future cash flows to come from the company's drillships.

"This presents the risk that if Vantage encounters unexpected downtime on any of its deepwater vessels, its profitability, liquidity, and credit measures could weaken significantly," said Standard & Poor's credit analyst Stephen Scovotti.

The negative outlook reflects our expectation that the company will re-contract its rigs coming off contracts at lower day rates. As a result, we expect credit measures to deteriorate in 2016, compared with expected 2015 results.

We could lower the rating if liquidity deteriorated or if we view debt leverage as unsustainable. We believe this could occur if offshore drilling conditions weaken beyond our expectations, which would result in sustained FFO/debt well below 12%.

We could revise the outlook to stable if Vantage is able to maintain FFO to debt above 12% on a sustained basis, while maintaining our view of "adequate" liquidity.

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