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Diamond Offshore Drilling (DO) Ratings Lowered to 'BBB+' by S&P; Sees Weaker Credit Measures on Day-Rates, Fleet Utilization

April 10, 2015 3:23 PM EDT

Standard & Poor's Ratings Services today lowered its corporate credit and unsecured debt ratings on Houston-based offshore drilling company Diamond Offshore Drilling Inc. (NYSE: DO) to 'BBB+' from 'A-'. At the same time, we affirmed our 'A-2' rating on the company's commercial paper program. The outlook is stable.

"The downgrade reflects our revised assumptions for day-rates and utilization of Diamond's uncontracted fleet and contract rollovers in light of weakening market conditions, resulting in weaker credit measures over the next two years," said Standard & Poor's credit analyst Carin Dehne-Kiley.

We are now assuming minimal re-contracting in 2015 and 2016. We believe that the large supply of newbuild deepwater rigs being delivered over the next one to two years, in conjunction with weak oil prices and lower offshore drilling activity, will significantly heighten recontracting risk and pressure day-rates in the lower-specification deepwater and midwater segments. Diamond has above-average exposure to the midwater segment, with nearly one-third of its fleet in this rig class.

We also believe Diamond could also be disadvantaged due to the older age of its fleet compared with some of its peers.

Our ratings on Diamond reflect our assessment of its "strong" business risk profile, "significant" financial risk profile, and "strong" liquidity, as well as our view that the company is a "moderately strategic" subsidiary of Loews Corp. under our group methodology criteria.

The stable outlook reflects our view that although market conditions in the offshore drilling sector could continue to deteriorate over the next 12 to 24 months, we expect Diamond's credit protection measures to remain appropriate for the rating.

We could consider a downgrade if we expected FFO to debt to fall and remain below 20% for a sustained period. This would most likely occur if the offshore drilling sector weakened beyond our expectations, or if the company made a significant, debt-financed acquisition that did not add to near-term cash
flow.

We could raise the rating if we expected FFO to debt to improve above 30% for a sustained period.



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