S&P Cuts CHC Group (HELI) CCR to 'B'; Credit Measures Seen Weaker than Expected

Standard & Poor's Ratings Services today said it lowered its long-term corporate credit rating on Cayman Islands-based CHC Group (NYSE: HELI) to 'B' from 'B+'. The outlook is stable.

At the same time, Standard & Poor's lowered its issue-level rating on subsidiary CHC Helicopter S.A.'s super senior revolving credit facility to 'BB-' from 'BB'. The '1' issue rating is unchanged and indicates very high (90%-100%) recovery in a default scenario. Standard & Poor's also lowered its issue-level ratings on the subsidiary's senior secured notes to 'B' from 'B+', and that on the senior unsecured notes to 'B-' from 'B'. The recovery ratings on the senior secured and unsecured notes are unchanged at average (30%-50%; at the higher end of the scale) and modest (10%-30%; at the lower end of the scale) recovery, respectively.

"The downgrade reflects our expectation that CHC's credit measures will be weaker than we had expected," said Standard & Poor's credit analyst Aniki Saha-Yannopoulos. With the recent material drop in commodity prices, exploration and production (E&P) companies have reduced their capital budgets considerably, postponing projects and demanding price concessions from oilfield service providers. Although we acknowledge that CHC's EBITDA will not face as much pressure as other oilfield service companies, we expect the EBITDA to drop as E&P companies reduce flight hours associated with exploration projects and focus on operating efficiency. We expect CHC to exit fiscal 2016 (year ended April 30) with debt-to-EBITDA about 6.5x, which is weaker than our previously forecast debt-to-EBITDA of about 5.0x. We are removing our positive comparable ratings analysis modifier because we do not expect the company's credit measures to exhibit an improving trend in the next 12 months.

CHC Helicopter, which operates a fleet of 233 helicopters in approximately 30 countries, is one of the two largest global helicopter service providers. It offers personnel and light cargo transportation services, primarily for oil and gas E&P companies (about 80% of its revenues), as well as search and rescue activities and emergency medical services, through its helicopter services segment. In addition, the company's Heli-One division provides helicopter support services.

The stable outlook on CHC Group reflects our expectation that, under our base-case scenario, the company's liquidity will remain adequate in fiscal 2016. CHC has significant cushion under its financial covenants, and we expect the company will look at various options to finance its new helicopter commitments as they come due.

We would consider a negative action if CHC's credit measures worsen such that its FFO-to-debt falls and stays below 5% or EBITDA-to-interest coverage falls below 2x with no expectation of material improvement. Although we do not expect it in the short term, we may also consider a negative action if the company's liquidity deteriorates such it has difficulty in financing its commitments, including capital expenditure, or is close to breaching its financial covenants.

We do not expect an upgrade in the next 12 months due to CHC's highly leveraged balance sheet. The company's principal ownership by private equity investors also constrains the ratings at the current level, as per our criteria. However, a positive action might be possible if CHC can demonstrate that its owners will manage its balance sheet to a sustained adjusted debt-to-EBITDA ratio of below 5x or if financial sponsor ownership reduces below 40%.

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