S&P Upgrades ION Geophysical (IO) to 'CCC+'; Outlook is Negative

October 7, 2016 11:13 AM EDT

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S&P Global Ratings raised the corporate credit rating on ION Geophysical Corp. (NYSE: IO) to 'CCC+' from 'SD'. The outlook is negative.

We raised the issue-level rating on the company's outstanding third-lien notes to 'CCC' from 'D'. We revised the recovery rating on these notes to 5', reflecting our expectation of modest (higher half of the 10% to 30% range) recovery to creditors in the event of a payment default, from '4'.

We also assigned a 'B-' issue-level rating on the company's new 9.125% second-lien notes with a recovery rating of '2', reflecting our expectation of substantial (lower half of the 70% to 90% range) recovery in the event of default.

The rating action follows ION's partial exchange of its 8.125% notes maturing in 2018 for new 9.125% second-lien notes maturing in 2021. We viewed this transaction as a distressed exchange due to the material discount to face value received by the 2018 notes.

"We view ION's business risk profile as vulnerable, based on its participation in the volatile and cyclical seismic data acquisition end market and its small scale compared with other much larger players in the industry such as WesternGeco," said S&P Global Ratings credit analyst David Lagasse. "The business risk assessment also incorporates the typically higher volatility of cash flows and earnings of seismic companies," he added.

The negative outlook reflects the high debt leverage, expected negative free cash flow, and the potential for liquidity to weaken such that the company is unable to meet its financial obligations if market conditions do not significantly improve.

We could lower ratings if liquidity weakens such that we expect that Ion could have difficulty supporting its interest expense and debt amortization costs. This most likely would occur if E&P companies fail to significantly increase spending in seismic activity, likely in conjunction with improving crude oil and natural gas prices.

We could revise the outlook to stable if ION reduces debt leverage below 7x and/or FFO to debt was above 5%, with the expectation of further improvement, while improving its ability to meet both expected capital spending and debt financing requirements. Such an event would likely be in conjunction with improving capital spending by E&P companies.

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