LINN Energy (LINE) Cut to 'B2' by Moody's; Reflects High Cost of Capital, Elevated Leverage

Moody's Investors Service downgraded Linn Energy, LLC's (LINE) (Nasdaq: LINE) Corporate Family Rating (CFR) to B2 from Ba3, its Probability of Default Rating (PDR) to B2-PD from Ba3-PD, and its unsecured notes ratings to B3 from B1. Moody's also affirmed LINE's SGL-3 Speculative Grade Liquidity Rating. At the same time, Moody's downgraded the senior unsecured notes ratings of Berry Petroleum Company (Berry) to B3 from B1. The outlooks at LINE and Berry are negative.

"Moody's downgrade of Linn Energy reflects the company's elevated financial leverage and high cost of capital, which limit its flexibility in the face of an external liquidity profile that is declining and a hedge book that will begin to roll off into materially lower commodity prices," commented Gretchen French, Moody's Vice President. "We positively note that LINE has taken a number of actions this year in response to the low price environment, including lowering and ultimately suspending its distribution, and focusing on reducing its debt burden. However, the lower CFR and negative outlook reflect the challenges the company faces in reaching sufficiently lower leverage levels prior to its hedge positions rolling off."

Issuer: Linn Energy, LLC

.Corporate Family Rating (CFR), downgraded to B2 from Ba3

.Probability of Default Rating (PDR), downgraded to B2-PD from Ba3-PD

.Senior Unsecured Notes, downgraded to B3 (LGD-5) from B1 (LGD-5)

.Speculative Grade Liquidity Rating (SGL), affirmed at SGL-3

.Outlook changed to negative from stable

Issuer: Berry Petroleum Company

.Senior Unsecured Notes, downgraded to B3 (LGD-5) from B1 (LGD-5)

.Outlook changed to negative from stable

RATINGS RATIONALE

LINE's B2 CFR reflects its high financial leverage profile and weak asset coverage of debt, with debt per average daily production and per proved developed reserves indicative of the Ca and B rating categories. The B2 rating also reflects constrained financial flexibility due to the company's high cost of capital.

LINE's B2 CFR is supported by the company's large reserve base and production scale across a diverse set of basins. The company's size and scale in terms of reserves, production and basin diversification is similar to Baa-rated E&P peers. In addition, the rating is supported by a profile of free cash flow generation and management focus on debt reduction, reflecting the suspension of its distributions, the benefit of a strong hedge position through 2016, and manageable capital spending required in order to offset a base 15% decline rate and keep production flat.

The SGL-3 Speculative Grade Liquidity Rating reflects LINE's adequate liquidity profile through 2016. Supporting LINE's liquidity profile is an expectation of free cash flow through 2016, with a high level of hedged production and management focus on debt reduction. However, LINE's alternative liquidity is declining, with borrowing base reductions expected on its revolving credit facilities in the upcoming October 2015 borrowing base redetermination and the need for debt reduction in order to have sufficient EBITDA/Interest covenant compliance of at least 2.5x through 2016.

LINE's senior unsecured notes are rated B3, one notch below the B2 CFR, reflecting the contractual subordination of the notes relative to the company's secured bank credit facility and high level of payables. Berry's senior unsecured notes are rated B3 reflecting the contractual subordination of notes relative to Berry's nearly fully drawn secured bank credit facility.

The outlook is negative. The ratings could be further downgraded if LINE is not successful in maintaining adequate liquidity and reducing debt levels sufficiently in order to improve cash flow coverage of debt such that retained cash flow/debt does not fall below 10%.

The ratings could be upgraded if LINE is able to meaningfully reduce debt balances such that when its hedge book begins to roll off, EBITDA/Interest is maintained above 3.0x and retained cash flow/debt is trending towards 15%.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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