S&P Downgrades Rowan Cos. (RDC) to 'B+'; Outlook is Stable

S&P Global Ratings lowered its corporate credit rating on Rowan Cos. Inc. (NYSE: RDC) to 'B+' from 'BB'. The outlook is stable.

At the same time, we lowered our issue-level rating on the company's senior unsecured debt to 'B+' from 'BB'. The recovery rating on this debt is '4', reflecting our expectation of meaningful (30% to 50%, upper half of the range) recovery to creditors in the event of a payment default.

We have also assigned a 'B+' issue-level rating and '4' recovery rating to the company's proposed $400 million senior unsecured notes issue due 2025.

"The downgrade reflects our revised assessment for Rowan's business risk profile and our revised utilization assumptions for the company's uncontracted fleet, which results in higher leverage than we had previously anticipated in 2018 and 2019," said S&P Global Ratings credit analyst Carin Dehne-Kiley.

Although Rowan has taken steps to respond to the market downturn, such as reducing operating costs and capital spending, and entering into "blend and extend" agreements for some of its contracted rigs, entering into a joint venture with Saudi Aramco and redeeming medium-term debt, we believe demand for offshore contract drilling services will remain oversupplied and depressed until at least late 2019.

The stable rating outlook on Rowan reflects our expectation that the company's credit measures will remain appropriate for the rating over at least the next 12-18 months. We project that FFO/debt will be in the 25% to 30% range in 2016, dropping to below 12% next year as utilization and dayrates decline.

We would consider a downgrade if the company's FFO/debt fell and remained well below 12% without a clear path to improvement, or if liquidity deteriorated. This would most likely occur if the company's fleet utilization was lower than our current expectation in 2018 and 2019.

We could raise the rating if we expected Rowan to maintain FFO/debt to remain above 12% for a sustained period, which would most likely occur in conjunction with an offshore drilling recovery.

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