Fitch: Update on Schahin-Sponsored Oil Vessel-Backed Financings

CHICAGO--(BUSINESS WIRE)-- As previously noted by Fitch Ratings, the accelerated deterioration of the credit quality of the Schahin group (Schahin) has heightened the risk of a potential termination of the charter and services agreements and has led to technical events of default being triggered on the Schahin-sponsored oil vessel-backed financings, Schahin II Finance Company (SPV) Limited (Schahin II) and Lancer Finance Company Ltd. (Lancer).

As a direct result of its financial problems, Schahin notified Petroleo Brasileiro S.A. (Petrobras: BBB-; Negative Outlook) on April 2, 2015 of their decision to temporarily suspend operations of five drilling vessels including Sertao and Lancer. These drilling units, which are the main source of cashflows for the Schahin II and Lancer transactions, currently remain suspended from operations.

On April 17, Lancer's parent (Carlyle's International Holding Ltd) and operator (Schahin Engenharia S.A.) and Schahin II's parent (Black Oil Drilling LLC) together with several other Schahin related entities requested chapter 11 bankruptcy protection ('recuperacao judicial') under Brazilian law. On May 4, 2015, Brazil's bankruptcy court granted chapter 11 bankruptcy protection to most of Schahin's Brazil-based companies, which included the rig operator Schahin Engenharia S.A. However, the offshore entities, including the parent companies of the related transactions, were excluded from the filing as these entities have no direct ownership relationship with Schahin's businesses in Brazil. Despite these rig assets being exempted from bankruptcy, the filing on Schahin's part constitutes an event of technical default for the transactions. Fitch continues to monitor this situation to measure the potential impact to the rated transactions.

On April 24, Fitch received written notification to the noteholders from Deutsche Bank, as Indenture Trustee, of the noteholders' right to declare a collateral disposition event, operator replacement event and early amortization event. The majority of the noteholders have yet to notify the trustee whether or not they would like to exercise their rights, including their intention to use the balance of cash in the trust accounts to pay the notes and/ or their decision to accelerate the notes and dispose of the collateral, including the repossession and sale of the vessels.

While Fitch believes the underlying vessels remain important to Petrobras' drilling operations, this suspension in drilling operations heightens the risk of an early termination by Petrobras of the underlying charter and services contracts. Fitch will continue to monitor these developments, as an early termination of the underlying contracts would expose the transactions to current depressed asset values (due to adverse market conditions). This termination may lead to a further downgrade in the rating of the notes.

OUTSTANDING RATINGS

Fitch currently rates Schahin II at 'B-'and Lancer at 'B', and both remain on Rating Watch Negative. Fitch's ratings address the timely payment of interest according to the original schedule and ultimate repayment of principal by legal final maturity of the bonds. Outstanding balance of the notes is approximately $67.4 million for Lancer and $651.5 million for Schahin II.

On May, 2015, the scheduled interest payment of $320,000 was made to the Lancer noteholders. No principal was paid during May 2015. The remaining net funds after covering trustee fees and expenses within the reserve accounts will be held by the indenture trustee waiting for instructions from the noteholders. The next scheduled interest payment is due on Sept. 25, 2015 for Schahin II and June 10, 2015 for Lancer.

Fitch's ratings on these transactions consider: (i) available liquidity in the form of cash and letters of credit deposited in the indenture trustee accounts which could be used to make debt service payments; (ii) the underlying Petrobras agreements; and (iii) the loan to values (LTVs) of the underlying vessels secured in the form of a naval mortgage on the vessels Sertao and Lancer. While both transactions remain exposed to the potential termination of the underlying charter and services agreements, the rating differential between Lancer and Schahin II contemplates the liquidity position represented by the current reserve accounts and the differences in LTV ratios.

Fitch's rating does not include any technical events of default or potential acceleration amounts. Such events may not cause an automatic downgrade of existing note ratings. Fitch will consider liquidity available in reserve funds to meet interest payments during the liquidation period as well as the ability of any asset liquidation proceeds to fully amortize outstanding principal balances.

TRANSACTION SUMMARY

The Schahin II notes are backed by flows related to a long-term charter and services agreement signed with Petrobras for the use of the dynamically positioned ultra-deepwater (UDW) drillship Sertao. Schahin Petroleo e Gas S.A. (Schahin P&G), the oil and gas arm of Schahin, is the operator of the vessel and primary sponsor of the transaction. As is noteworthy, Schahin P&G was not part of the group's bankruptcy filing. The Lancer Finance notes are backed by flows related to a long-term charter and services agreement signed with Petrobras for the use of the dynamically positioned drillship S.C. Lancer. Schahin Engenharia S.A. is the operator of the drilling rig.

Additional information is available at 'www.fitchratings.com'.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Cinthya Ortega
Director
+1 312-606-2373
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Greg Kabance
Managing Director
+1 312-368-2052
or
Gregory Lane
Director
+1 312-606-2304
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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