Moody's Downgrades Willbros Group (WG) to 'Caa1,' Outlook Negtive

Moody's Investors Service downgraded Willbros Group's (NYSE: WG) (Willbros) corporate family rating to Caa1 from B3, its probability of default rating to Caa1-PD from B3-PD and its asset-based revolving credit facility rating to B3 from B1. The rating downgrades reflect Willbros' inconsistent project execution, recent poor operating results and weak credit metrics, which are expected to persist over the next 12 to 18 months. Moody's affirmed Wiilbros' Speculative Grade Liquidity Rating of SGL-3. The ratings outlook is negative.

The following actions were taken:

Issuer: Willbros Group, Inc.

Downgrades:

Corporate Family Rating, Downgraded to Caa1 from B3;

Probability of Default Rating, Downgraded to Caa1-PD from B3-PD;

Affirmations:

Speculative Grade Liquidity Rating, Affirmed at SGL-3

Outlook Actions:

Outlook, Assigned Negative Outlook

Issuer: Willbros United States Holdings Inc.

Downgrades:

$150 Million Asset-Based Lending Facility, Downgraded to B3 from B1

RATINGS RATIONALE

Willbros' Caa1 corporate family rating reflects its small size, low profit margins, high leverage, weak interest coverage, modest short-term backlog, exposure to highly competitive and cyclical end markets and track record of inconsistent project execution. The company has historically struggled to generate consistent profitability and has produced very weak EBITDA margins due to the competitive nature of the engineering and construction industry, periodic execution and productivity issues and its inability to effectively execute its growth strategy.

Willbros had to delay SEC filings and restate its financial results twice in 2014 to account for higher than anticipated costs on a few projects. This was another example of the company's inability to consistently bid and execute on projects within its budgeted cost and time frame. The company has also suffered from a poorly executed strategy to expand its focus on regional project work in the shale basins and from less project opportunities due to plunging oil and natural gas prices. As a result, Willbros incurred operating losses of $54 million in its oil & gas segment in 2014, which weighed heavily on its operating performance. The company reported adjusted EBITDA of only $72 million in 2014 versus $109 million in the prior year.

Willbros has been selling assets to offset the impact of negative cash generation, cover the final payment of $32.7 million in connection with the settlement of the WAPCo project litigation, to assuage customers concerned about its credit profile and hold down its debt level in an attempt to stay in compliance with debt covenants. However, despite proceeds of about $133 million between January 2014 and March 2015, the company was still on course to breach its covenants due to its poor operating performance. Therefore, it had to issue 10.1 million shares of common stock, or 19.9% of its outstanding shares, to term-loan lender KKR Credit Advisers in March 2015 to obtain an amendment that included the suspension of financial covenants through March 2016.

Willbros profitability will remain poor in 2015 as weak upstream oil & gas spending in North America and lost EBITDA from sold businesses more than offset the benefit from the company's decision to shrink the footprint of its oil & gas regional field offices and to pursue other cost cuts. Therefore, we anticipate the company will generate EBITDA in the range of $15 million to $30 million. This will result in very weak credit metrics with negative interest coverage (EBITA/Interest Expense) and a leverage ratio (Debt/EBITDA) of more than 8.0x.

Willbros speculative grade liquidity rating of SGL-3 reflects its adequate liquidity. The company had $123 million of liquidity as of March 31, 2015 consisting of about $39 million in cash and $84 million of borrowing availability. The company is expected to maintain adequate liquidity over the next 12 months as it pursues additional asset sales to pay down debt and to offset modestly negative free cash flow. However, the company's operating performance will have to improve substantially to avoid breaching the debt covenants on its revolver. The company will have to achieve a maximum leverage ratio of 3.0x and a minimum interest coverage ratio of 3.0x when the covenants are reinstated for the twelve month period ending June 2016.

Willbros asset-based revolving credit facility is rated B3, one notch above the corporate family rating due to its first priority lien on the more liquid and sizeable current assets of the company. The revolver has a first priority security interest in all assets except real property, machinery and equipment. The term loan has a first priority lien on all assets not included in the ABL revolver borrowing base and a second priority lien on the ABL collateral. Therefore, the term loan lenders would disproportionately absorb creditor losses in the event of default. The two notch rating downgrade reflects the recent pay down of term loan debt and the reduction in this loss absorbing buffer.

Willbros negative outlook reflects the risk that its operating performance will remain weak due to persistently low oil and natural gas prices or continued execution issues, leading to sustained metrics that are consistent with a lower rating and increasing the likelihood of a covenant breach in 2016.

Willbros rating is not likely to experience upward pressure in the near term, but could be upgraded should the company grow its backlog of orders and sustain adjusted leverage (Debt/EBITDA) below 6.5x, interest coverage (EBITA/Interest Expense) above 1.0x and maintain an adequate liquidity profile.

Downward rating pressure could develop if Willbros sustains its adjusted leverage above 7.5x or its interest coverage below 0.5x. Downward rating action could also occur if the company generates negative EBITDA, its liquidity is significantly reduced or the company does not maintain compliance with its bank covenants.

The principal methodology used in these ratings was Construction Industry published in November 2014. 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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