S&P Downgrades California Resources (CRC) to 'CC'; Outlook is Negative

• U.S.-based California Resources Corp. has announced a $525 million tender offer for its senior unsecured and second-lien notes at a material discount to par, which we view as a distressed transaction and selective default at the close of the tender.
• As a result, we are lowering the corporate credit rating to 'CC' from 'CCC+'.
• We are lowering the senior unsecured ratings to 'CC' from 'CCC+', and revising the recovery rating to '6' from '3'. We are lowering the rating on the company's second-lien notes to 'CC' from 'B', and revising the recovery rating to '3' from '1'.
• We are affirming the 'B' issue-level rating on the company's senior secured first-lien loan and credit facility, and the recovery ratings remain '1'. California Resources is marketing a $700 million first-lien "second out" term loan to both repay existing first-lien debt and fund a $525 million tender offer. We are assigning the "second out" term loan a preliminary 'B' rating, and a preliminary '1' recovery.
• The negative outlook reflects the likelihood that we will lower the corporate credit rating to 'SD' at the close of the tender.

S&P Global Ratings today lowered its corporate credit rating on Los Angeles-based oil and gas exploration and production company California Resources Corp. to 'CC' from 'CCC+'. The outlook is negative.

We also lowered the issue-level rating on the company's second-lien debt to 'CC' from 'B' and revised the recovery rating to '3' from '1', indicating our expectation of meaningful (50% to 70%, higher half of the range) recovery in the event of default. At the same time, we lowered the senior unsecured issue-level ratings to 'CC' from 'CCC+', and revised the recovery rating to '6' from '3', indicating our expectation of negligible (0% to 10%) recovery in the event of default.

We assigned a 'B' preliminary rating to the company's proposed $700 million first-lien second-out term loan. The preliminary recovery rating is '1', indicating our expectation of very high (90% to 100%) recovery in the event of a payment default.

We are also affirming the 'B' issue-level rating on the company's senior secured first-lien first-out term loan and credit facility. The recovery ratings remain '1', indicating our expectation of very high (90% to 100%) recovery in the event of a payment default.

"The rating actions reflect our view of California Resources' announcement that it plans to issue a $525 million tender offer to holders of its senior unsecured and second-lien notes," said S&P Global Ratings credit analyst Paul Harvey. "We view the transaction as distressed because participating note holders will receive significantly less than par value as part of the tender and the recovery prospects are weaker," he added. We expect to lower the corporate credit to 'SD' and ratings on participating notes to 'D' at the close of the transaction.

We revised the recovery ratings on the senior unsecured and second-lien debt due to the combination of expected new priority debt, the $700 million first-lien second-out term loan, and lower expected asset value in a default based on an updated midyear 2016 PV-10 value provided by California Resources evaluated using our recovery methodology assumptions for exploration and production companies.

The outlook is negative. Once the transaction has closed, we will lower the corporate credit rating to 'SD' and the rating on the senior unsecured notes and second-lien notes, if they participate in the tender, to 'D'.

We will reevaluate the company's corporate credit rating and issue-level ratings following the close of the tender. At this time, we expect to raise the corporate credit rating to 'CCC+' from 'SD'.

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