Pacific Drilling (PACD) Downgraded to 'CCC-' by S&P; Outlook Negative

November 10, 2016 11:02 AM EST

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S&P Global Ratings lowered its corporate credit rating on Pacific Drilling S.A. (NYSE: PACD) to 'CCC- from 'CCC+'. The outlook is negative.

At the same time, we lowered the issue-level rating on the company's secured 2013 credit facility to 'CCC+' from 'B'. We also lowered the rating on the company's term loan and senior secured notes to 'CCC' from 'B-'. The recovery rating remains '1' on the 2013 credit facility, indicating our expectation of very high (90%-100%) recovery, and '2' on the term loan and notes, indicating our expectation of substantial (70% to 90%, lower half of the range) recovery, in the event of a payment default.

"The downgrade reflects our expectation of limited activity in deep-water offshore drilling due to continued low oil prices, and the negative impact on Pacific Drilling's expected cash flows to support high debt levels and upcoming maturities," said S&P Global Ratings credit analyst Michael Tsai.

We project three of the company's seven deepwater drillships to work in 2017, with the expectation that the Pacific Bora continues to find short-term work at low day rates of just above $200,000. We expect 2018 activity to continue to be depressed, with some possibility of uplift in the second half of the year. We project the company's other four drillships to be "smart-stacked" through 2018.

The negative outlook reflects our expectation that we could lower the rating if the company announces or engages in a transaction to restructure its balance sheet in a manner we would consider selective default, or if it is unable to obtain covenant waivers and breaches maintenance covenants on its credit facilities.

We could raise the rating if we believed that Pacific Drilling would not likely breach financial covenants, and the company is able to extend its upcoming debt maturities, while avoiding a distressed transaction.

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