Moody's Lowers Transocean (RIG) to 'Baa1'; Sees Increased Leverage on 'Prolonged Industry Down-Cycle'

Moody's Investors Service (Moody's) downgraded Transocean's (NYSE: RIG) senior note rating to Ba1 from Baa3 to reflect the company's large capital commitments and Moody's expectation for a significant increase in leverage as the company enters what it believes could be a prolonged industry down-cycle. Moody's also assigned a Ba1 Corporate Family Rating and SGL-1 Speculative Grade Liquidity Rating. This action concludes the ratings review that was initiated on January 6, 2015.

"Transocean has been weakly positioned in its rating for the last few years as it focused on lingering issues related to Macondo, increased shareholder payouts, and pursued a strategy to revitalize its fleet," said Stuart Miller, Moody's Vice President -- Senior Credit Officer. "While the company has made important strides to improve operational performance over the last two years, Moody's believes the rapid drop in oil prices in late 2014 and early 2015, combined with the company's large capital commitments for the construction of new drilling rigs, has significantly increased the credit risk to Transocean's bond holders and we expect leverage to increase materially through 2017 while the market for offshore drilling contractors deteriorates."

A complete list of the rating actions is as follows:

.Corporate Family Rating: assigned Ba1

....Probability of Default Rating: assigned Ba1-PD

....Senior Unsecured: downgraded to Ba1 LGD 4 -- 51% from Baa3

.Loss Given Default Rating: assigned LGD 4 -- 51%

.Speculative Grade Liquidity: assigned SGL -- 1

....Outlook: Stable

RATINGS RATIONALE

Transocean's Ba1 rating reflects Moody's growing concern that leverage will increase materially through 2017 in light of deteriorating market conditions, contract roll-off, and the large capital commitments that have been made for the construction of new drilling rigs. Moody's believes leverage will rise to 5.5x to 6.0x as EBITDA falls to under $2 billion in 2017 while debt, including Moody's adjustments, falls marginally to around $11 billion. To the extent Transocean Partners, LLC is used to raise equity to pay down debt further, it would come at the expense of increased organizational complexity and likely structural subordination of cash flows -- these factors would offset most of the benefit of lower leverage. Moody's recognizes that the risk of large future payouts associated with the Macondo incident are greatly diminished; however, Moody's continues to include a debt adjustment to provide for the possibility that additional payouts may be necessary to settle outstanding litigation.

Transocean has begun to address the weakening market conditions by offering a plan to reduce its dividend and by initiating another round of cost-cutting measures. However, Moody's believes that the company has limited or unpalatable options to avoid a significant increase in leverage over the next few years as rig contracts expire and dayrates fall. The issuance of equity at current market valuations would be highly dilutive and the sale of under-utilized assets at anything other than fire-sale prices would be very difficult to achieve in the current over-supplied offshore rig market. Transocean's Ba1 rating considers its market leadership position, its size and scale that is significantly larger than its closest competitor, and its reputation for innovation and industry-leading drilling capabilities. Once the fleet renewal program nears completion in 2017, depending on market conditions, Transocean's credit quality could improve. But in the interim, as its balance sheet becomes more leveraged, its financial flexibility will be reduced and the older rigs in its fleet will be a drag on financial operating performance in a very difficult market.

Transocean has very good liquidity at least through the end of 2015 with $2.9 billion of unrestricted cash and $3.0 billion of unused revolving credit facility availability. However, in order to maintain leverage at appropriate levels as operating cash flow falls over the next two to three years, the company may become more dependent on asset sales, Transocean Partners equity issuance, and a reduction in the unrestricted cash balance to reduce outstanding debt, to make scheduled Macondo settlement payments, and to pay its reduced dividend payout.

To be considered for an upgrade, Moody's would need to have visibility that leverage is trending lower and is headed towards 4.0x. Its fleet renewal program should also be mostly complete and committed capital expenditures and dividends should be funded out of operating cash flow. Transocean could be downgraded if leverage is expected to be maintained above 6.0x for an extended period of time.

The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in December 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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