S&P Downgrades Hornbeck Offshore Service (HOS) to 'CCC+'; Outlook is Negative

July 6, 2016 2:59 PM EDT
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S&P Global Ratings lowered its corporate credit rating on Hornbeck Offshore Services Inc. (NYSE: HOS) to 'CCC+' from 'B+'. The outlook is negative.

At the same time, we lowered our issue-level rating on the company's unsecured debt to 'B-' from 'BB-'. The recovery rating on this debt is '2', indicating our expectation of meaningful (70% to 90%, lower half of the range) recovery to creditors in the event of a payment default.

The ratings on Hornbeck reflect our assessment of the company's business risk as weak (revised from fair), its financial risk as highly leveraged (revised from aggressive), and liquidity as adequate. Hornbeck operates in the marine services business, focusing on support for offshore drilling rigs. We consider marine services to be highly competitive, with relatively few barriers to entry. Hornbeck currently operates a fleet of 62 new generation offshore supply vessels (OSVs) and seven multipurpose support vessels (MPSVs). As of June 30, 2016, the company projected to have 46 OSVs stacked in response to weak market conditions. In addition to taking supply off the market, stacking vessels reduces operating expenses, reduces wear and tear on the vessels, and allows Hornbeck to defer cash outlays on drydocked vessels.

The negative outlook reflects our view that Hornbeck Offshore's liquidity could deteriorate more quickly than we currently anticipate, as operating cash flows are neutral to negative and it works through its cash balance over the next one to two years.

We could lower the rating if liquidity deteriorated such that we no longer expected the company to be able to meet its financial or other obligations.

We could revise the outlook to stable if we expected Hornbeck to generate positive FFO, which would most likely occur if the company were able to increase dayrates and utilization of its fleet, most likely in conjunction with an industry recovery, while maintaining adequate liquidity.

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