Moody's Affirms Transocean (RIG) CFR, PDR; Existing Senior Note Ratings Cut to 'Caa1'

Moody's Investors Service (Moody's) assigned a B1 rating to Transocean Inc.'s (NYSE: RIG) (Transocean) offering of $1.5 billion senior notes due 2023. Concurrently, Moody's has downgraded the existing senior notes ratings to Caa1 from B2. Transocean's B2 Corporate Family Rating (CFR) and the B2-PD Probability of Default Rating (PDR) were affirmed. The company's Speculative Grade Liquidity Rating (SGL) of SGL-1 was affirmed and the rating outlook is stable.

The proposed senior notes will be unsecured but will be guaranteed by certain Transocean subsidiaries and its parent company, Transocean Ltd. The proceeds of the notes offering will be used to repurchase outstanding notes as outlined in a simultaneously announced tender offer and for general corporate purposes.

"This senior notes offering and concurrent tender offer will improve Transocean's debt maturity profile and enhance its already very good liquidity position," said Pete Speer, Moody's Senior Vice President. "However, the existing senior notes that remain outstanding will be structurally subordinated to the new notes following this transaction, which resulted in the downgrade of the existing senior notes ratings."

Downgrades:

..Issuer: Transocean Inc.

....Senior Unsecured Regular Bond/Debentures, Downgraded to Caa1 (LGD 5) from B2 (LGD 4)

Assignments:

....Senior Unsecured Regular Bond/Debenture, Assigned B1 (LGD 3)

Affirmations:

.... Probability of Default Rating, Affirmed B2-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-1

.... Corporate Family Rating, Affirmed B2

Outlook Actions: ....Outlook, Remains Stable RATINGS RATIONALE

The assigned B1 rating on Transocean's proposed $1.5 billion senior notes due 2023 is one notch higher than the B2 CFR, reflecting the new notes' structurally superior position in Transocean's capital structure relative to the existing senior notes and revolving credit facility. The new senior notes will be guaranteed by newly formed intermediate holding company subsidiaries, effectively giving the new notes a priority claim to the assets held by Transocean's operating and other subsidiaries.

The structural subordination of Transocean's existing senior notes resulted in these notes being downgraded to Caa1 from B2, or two notches below the B2 CFR. The existing senior notes are unsecured and have no subsidiary guarantees and therefore their claim to the assets held by Transocean's operating and other subsidiaries will be subordinate to the claims of the new notes.

Under Moody's Loss Given Default Methodology, the significant amount of debt structurally subordinated to the new notes would indicate a Ba3 rating for the new notes, while the revolving credit facility remaining pari passu with the existing notes would indicate a B3 rating for the existing notes. Moody's views the assigned B1 and Caa1 ratings as more appropriate given the potential for the revolving credit facility to become pari passu with the new notes or even secured in the future, and the potential for other future secured debt issuances as Transocean continues to manage its debt maturities and the existing senior unsecured notes become a smaller portion of the overall capital structure. Moody's observes that depending on the amount of any future secured debt issuances, the B1 rating on the new notes could be downgraded.

Transocean's B2 CFR reflects Moody's expectation that the company's financial leverage will rise through 2017 and then will likely increase substantially in 2018 based on Moody's outlook for weak dayrates and stagnant or declining rig utilization. The company has more new rig construction commitments than many of its peers. But Transocean has been very successful in deferring many of those capital spending commitments into 2019 and beyond. The B2 rating is supported by the company's proactive measures to reduce operating costs, address debt maturities and enhance operational utilization for its active rigs, its very good liquidity and its large and diverse offshore drilling rig fleet.

Transocean's SGL-1 Speculative Grade Liquidity rating reflects very good liquidity through 2017 because of its sizable cash balance and borrowing availability under its credit facility. The company had $2.6 billion of unrestricted cash at March 31, 2016 and full availability under its $3.0 billion revolving credit facility. The cash balance and operating cash flow should more than cover anticipated capital expenditures and debt maturities through 2017. At March 31, 2016, Transocean had $974 million, $568 million and about $1 billion of senior notes maturing in 2016, 2017, and 2018, respectively. The issuance of the new notes and announced tender offer for existing senior notes maturing in 2020 through 2022 will effectively refinance a portion of those maturities while increasing cash balances for the nearer term maturities. Moody's expects that the company will use any remaining proceeds of the new notes following the tender offer and existing cash balances to repay its upcoming debt maturities.

The committed bank revolving credit facility matures in June 2019 and has one financial maintenance covenant, limiting debt to capitalization to 60%. There is good headroom to remain in compliance through 2017. Asset sales, while challenging given the market conditions for offshore drilling rigs, can be used to raise cash since the company's assets are unencumbered. The sale of Transocean's equity interests in Transocean Partners is an additional source of liquidity, if needed, although current market conditions may make such sales challenging.

The stable outlook incorporates the company's very good liquidity to offset the weak offshore drilling environment and Moody's expectation that Debt/EBITDA will increase to over 5x in 2017.

An upgrade is unlikely given our expectations for rising financial leverage over the next few years. If Debt/EBITDA can be sustained below 5x beyond 2017 in a stable or improving offshore drilling market then the ratings could be upgraded. Obtaining customer contracts on rigs under construction at healthy dayrates would be supportive of an upgrade. The ratings could be downgraded if Debt/EBITDA rises above 6x on a sustained basis or the company is not able to maintain ample liquidity in advance of its debt maturities. Debt funded acquisitions or a material loss of backlog could also pressure the ratings.

The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in December 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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