S&P Cuts Hercules Offshore (HERO) to 'CC' Following Restructuring Support Agreement
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On June 18, 2015, Standard & Poor's Ratings Services lowered its corporate credit rating on Hercules Offshore (NASDAQ: HERO) to 'CC' from 'CCC+', and its issue-level rating on the company's senior unsecured notes to 'CC' from 'CCC+'. At the same time, we placed the ratings on CreditWatch with negative implications. The '4' recovery rating on the senior unsecured notes is unchanged, reflecting our expectation of average (lower end of the 30% to 50% range) recovery for lenders in the event of a payment default.
The downgrade follows HERO's announcement that it has entered into a restructuring support agreement with a steering group of the company's senior noteholders, collectively owning or controlling in excess of 67% of the aggregate outstanding principal amount of the company's 10.25% senior notes due 2019, 8.75% senior notes due 2021, 7.5% senior notes due 2021, and 6.75% senior notes due 2022. Pursuant to the agreement, the noteholders have agreed to support a deleveraging transaction pursuant to which approximately $1.2 billion of the company's outstanding notes will be converted to new common equity, and backstop $450 million of new debt financing, which will fund the remaining construction cost of the Hercules Highlander and provide additional liquidity. Under the agreement, the company and the noteholders will seek to implement this balance sheet restructuring through either a Chapter 11 case or prepackaged plan of reorganization.
We will re-evaluate the company's corporate credit rating upon implementation of the restructuring or filing Chapter 11 of the U.S. Bankruptcy Code.
The CreditWatch placement reflects the possibility that we will lower ratings further on the implementation of a prepackaged plan of reorganization or commencement of a Chapter 11 proceeding, and we expect bondholders to receive less than what they were originally promised on the securities. We expect this to be resolved early in the third quarter of 2015.
Subsequently, we will re-evaluate HERO's corporate credit rating and proposed $450 million notes issue-level rating under its new capital structure.
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