Moody's Upgrades W&T Offshore (WTI) to 'Caa2'; Outlook Lowered to Negative

September 15, 2016 12:35 PM EDT

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Moody's Investors Service (Moody's) upgraded W&T Offshore, Inc.'s (NYSE: WTI) Corporate Family Rating (CFR) to Caa2 from Caa3, Probability of Default Rating (PDR) to Caa2-PD/LD from Caa3-PD, Speculative Grade Liquidity (SGL) Rating to SGL-3 from SGL-4, and changed the rating outlook to stable from negative. The existing Caa2 senior secured second lien term loan rating and the Ca unsecured notes rating were affirmed.

The appending of the PDR with an "/LD" designation indicates limited default, reflecting the recent closing of the company's exchange of $710 million of its 8.5% senior unsecured notes due 2019 for $160 million of new senior second lien PIK toggle notes due 2020 (unrated), $142 million of new third lien PIK toggle notes due 2021 (unrated) and 60.4 million shares of common stock. Moody's views this debt exchange as a distressed exchange, which is a default under Moody's definition of default. The "/LD" designation will be removed after three business days. W&T also issued $75 million of new 1.5 lien senior secured term loan (unrated), the net proceeds of which are expected to be used to partially reduce the borrowings outstanding under the company's senior secured revolving credit facility.

"The upgrade of W&T's CFR reflects material reduction in debt balances and a modest extension of its debt maturity profile resulting from the completed debt exchange," commented Amol Joshi, Moody's Vice President. "The change in outlook to stable reflects W&T's adequate liquidity profile."

Upgrades:

..Issuer: W&T Offshore, Inc.

.... Probability of Default Rating, Upgraded to Caa2-PD /LD from Caa3-PD

.... Speculative Grade Liquidity Rating, Upgraded to SGL-3 from SGL-4

.... Corporate Family Rating, Upgraded to Caa2 from Caa3

Affirmations:

....Senior Secured Second Lien Term Loan, Affirmed Caa2 (LGD 3 from LGD 2)

....Senior Unsecured Regular Bond/Debentures, Affirmed Ca (LGD 6 from LGD 5)

Outlook Actions:

..Issuer: W&T Offshore, Inc.

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

W&T's Caa2 CFR reflects the company's still high debt burden relative to its cash flow in a subdued commodity price environment, material plugging and abandonment (P&A) obligations that require recurring cash outlays, geographic concentration in the US Gulf of Mexico, elevated event risk that could reduce the company's cash balances, and significant reinvestment requirements to extend a short reserve life. The rating is supported by the company's long operating history in the GoM and a good track record of success with exploration activity, in addition to its adequate liquidity profile.

W&T's SGL-3 Speculative Grade Liquidity Rating reflects expectations for adequate liquidity through 2017. The company's $172 million of cash as of 30 June 2016 combined with the likelihood of improved operating cash flow generation supported by its reduced debt and lower short-term cash interest burden will be sufficient to cover all basic cash needs through 2017. However, the risk of a significant usage of available cash to collateralize additional surety bonds to satisfy BOEM requirements remains high. The revolving credit facility has a borrowing base of $150 million and the commitments expire in November 2018. Pro forma for the new 1.5 lien senior secured term loan, approximately $75 million is available under the revolving credit facility. The amended financial covenants under the credit facility include a First Lien Leverage Ratio of no greater than 2.5x, which steps down to 2.0x starting from the quarter ending 30 September 2017, and an asset coverage ratio of 1.25x through 31 December 2016. Moody's expects the company to maintain sufficient cushion for future compliance under the covenants through 2017. All assets are encumbered and any proceeds from asset sales will likely need to be used to repay secured debt or reinvest in oil and gas assets.

W&T's unsecured notes are rated Ca, two notches below the Caa2 CFR, reflecting the priority claim given to the senior secured revolving credit facility, the 1.5 lien senior secured term loan, the second lien term loan, the second lien PIK toggle notes, and the third lien PIK toggle notes. The existing second lien term loan is rated Caa2, in line with the CFR, reflecting the term loan's priority claim over the third lien PIK toggle notes and unsecured notes in the capital structure.

The stable outlook reflects Moody's expectation that the company will manage its business within operating cash flow through 2017, and further near-term cash needs to satisfy BOEM requirements will be limited.

A downgrade is possible if the company's liquidity falls below $100 million. An upgrade may be possible if EBITDA to interest expense (including PIK interest) rises and is sustained above 2.5x, while avoiding sizable production declines and maintaining adequate liquidity.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.



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