S&P Lowers Hornbeck Offshore Service (HOS) Issuer Rating to 'B+'; Sees Weakening Rates in 2015

Standard & Poor's Ratings Services today lowered its issuer credit rating on Hornbeck Offshore Service (NYSE: HOS) to 'B+' from 'BB-'. The outlook is stable.

At the same time, we affirmed our 'BB-' issue-level ratings on the company's senior unsecured debt and revised the recovery ratings to '2' from '3', indicating our expectation that lenders could expect substantial (70% to 90%) recovery in the event of a payment default. Our recovery expectations are in the upper half of the 70% to 90% range.

"The downgrade reflects our expectation that the company's utilization and day rates will weaken in 2015, beyond our initial expectations, and in comparison to 2014," said Standard & Poor's credit analyst John Rogers. "Offshore drilling activity has declined precipitously, creating a further glut of support vessels and drilling rigs available in the offshore market, especially in the Gulf of Mexico," he added.

Moreover, Hornbeck and many of its competitors are in the midst of expansion programs, adding more vessels during a period of weak demand. We expect Hornbeck will continue to stack lower-specification vessels as it focuses on fleet rationalization to reduce operating expenditures and improve utilization rates.

The stable outlook reflects our expectations that Hornbeck will maintain FFO to debt of 12% to 15% over the next two years as the company faces challenging market conditions in the Gulf of Mexico.

We could lower the rating if Hornbeck's day-rates, utilization, and cash flow generation fell below our current expectations, such that we expected FFO to debt to weaken to less than 12% for a sustained period.

Although unlikely over the next 12 months, we could raise the rating if we expected FFO to debt to be above 20% for a sustained period. We could also raise the rating if we viewed an improvement in Hornbeck's business risk profile and a more favorable view of the company's competitive position. We would consider this if Hornbeck continues to build its scale and size relative to its oilfield services peers while maintaining credit measures consistent with our current expectations.

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