S&P Downgrades Stone Energy (SGY) to 'CCC-'; Outlook Negative

Standard & Poor's Ratings Services lowered its corporate credit rating on Stone Energy Corp. (NYSE: SGY) to 'CCC-' from 'CCC+'. The outlook is negative.

At the same time, we lowered our issue-level rating on the company's unsecured debt to 'CCC-' from 'CCC+'. The recovery rating is '3', indicating our expectation of meaningful (50% to 70%, upper half of the range) recovery in the event of a payment default.

The downgrade reflects the increased risk that Stone could elect to file for chapter 11 and/or restructure its debt following the draw-down on its credit facility. We expect that the company could skip its next interest payment on its senior unsecured notes due in May 2016. Additionally, we expect the borrowing base for the company's reserve-based lending facility to decrease in the spring, further pressuring liquidity on top of lower cash flows from operations. We also note that the company has an upcoming $300 million maturity in March 2017, and we believe the company would have trouble accessing the capital markets to refinance it given current market conditions.

"The negative outlook on Stone Energy reflects the likelihood the company could default on its debt and/or announce a negotiated debt restructuring given its declining liquidity and the upcoming maturity of its 2017 notes," said Standard & Poor's credit analyst David Lagasse.

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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