UPDATE: S&P Downgrades Midstates Petroleum (MPOY) to 'CCC-'; Sees Potential for Chapter 11 Filing

(Updated - February 10, 2016 11:33 AM EST)

Standard & Poor's Ratings Services today lowered its corporate credit rating on Midstates Petroleum Co. Inc. (OTC; MPOY) to 'CCC-' from 'CCC+'. The outlook is negative.

(Note: It was erroneously reported earlier that Marathon Petroleum was downgraded by S&P, which is not the case.)

At the same time, we lowered our issue-level rating on the company's second-lien debt to 'CCC' from 'B-'. The recovery rating is '2', indicating our expectation of substantial (70% to 90%, lower half of the range) recovery in the event of a payment default. We also lowered our issue-level ratings on the company's third-lien and senior unsecured debt to 'C' from 'CCC-'. The recovery rating is '6', indicating our expectation of negligible (0% to 10%) recovery in the event of a payment default.

"The downgrade reflects the risk that Midstates Petroleum could elect to file for chapter 11 following the draw-down on its credit facility," said Standard & Poor's credit analyst Michael Tsai. "As a result of the draw, we expect Midstates to trip its 1x first-lien leverage covenant under its reserve-based lending facility based on our 2016 forecast for EBITDA under $150 million," he added.

We expect that the company could skip its next interest payment on its 10.75% senior unsecured notes due April 1, 2016. Additionally, we expect the borrowing base on the company's reserve-based lending facility to decrease in the spring, which will cause the company to be overdrawn.

We also revised our assessment on the company's liquidity to less than adequate from adequate. After accounting for the draw on the credit facility, we expect the company to generate negative funds from operation (FFO) in 2016. We also expect the company will have limited access to additional capital.

The negative rating outlook on Midstates Petroleum reflects the likelihood the company could default on its debt, including the upcoming interest payment on its 10.75% senior unsecured notes.

Although unlikely given our current expectations, we could consider raising the rating if we expect the company will be able to pay all debt obligations in full and on time.

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