Fitch Downgrades Schahin-Sponsored Oil Vessel-Backed Financings; Assigns Recovery Estimates

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings downgrades the notes issued by Schahin II Finance Company (SPV) Limited and Lancer Finance Company Ltd. and assigns Recovery Estimates (REs) as follows:

Schahin II Finance Company (SPV) Limited (Schahin II)

--Series 2012-1 senior secured notes due 2023 to 'CC' from 'B-', removed from Negative Watch; RE65 (approximately $650 million outstanding).

Lancer Finance Company Ltd. (Lancer Finance)

--Series 2010-1 senior secured notes due 2016 to 'CCC' from 'B', removed from Negative Watch; RE100 (approximately $67 million outstanding).

KEY RATING DRIVERS

Fitch's rating actions on Lancer Finance and Schahin II reflect the termination of the underlying charter and services agreements by Petroleo Brasileiro S.A. (Petrobras, 'BBB-', Negative Outlook). Fitch's ratings on these transactions also consider 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, and the loan-to-values (LTVs) of the underlying vessels secured in the form of a naval mortgage on the vessels Sertao and Lancer. The rating differential between Lancer and Schahin II contemplates the liquidity position represented by the current reserve accounts and the differences in LTV ratios.

As previously noted by Fitch, the accelerated deterioration of the credit quality of the Schahin group (Schahin) heightened the risk of a termination of the charter and services agreements for Sertao and S.C. Lancer. As a direct result of its financial problems, Schahin suspended operations of five drilling vessels including Sertao and S.C. Lancer on April 2015. The Petrobras contracts for the operation of those drilling units were the main source of cashflows for the Schahin II and Lancer transactions. Timely debt service payment relies on the funds available in the reserve accounts.

The early termination of the underlying contracts for S.C. Lancer and Sertao exposes the transactions to current depressed market conditions. Offshore drilling day rates continue to come under considerable pressure, but a limited number of rig tenders provide poor visibility of spot-market terms. Worldwide offshore drilling day rates for ultra-deepwater rigs are broadly estimated to be down roughly 40% from pre-cycle levels.

RATING SENSITIVITIES

The ratings of these transactions are sensitive to any significant decreases on the balance of the reserve accounts. Fitch will consider liquidity available in reserve funds to meet interest payments during the liquidation period. While noteholders may receive a higher recovery, in net present value terms by partially prepaying the notes with liquidity from the reserve accounts, it would reduce the available time to sell the vessels before the next interest payment is due.

Additionally, Fitch will take a further negative rating action if the proceeds from the liquidation of the vessels are not sufficient to fully amortize the outstanding principal balances.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action

TRANSACTION SUMMARY

The Schahin II notes were 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 Brazilian-based Schahin group, was the operator of the vessel and primary sponsor of the transaction. The Lancer Finance notes were 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. was the operator of the drilling rig.

RECOVERY ESTIMATES

Fitch assigns an RE65 to the Schahin II notes and RE100 to the Lancer notes. Fitch assigns REs to all classes rated 'CCC' or below. REs are forward-looking, taking into account Fitch's expectations for principal repayments on a distressed structured finance security. Fitch's RE relates to an estimate of the current liquidity position within the trust accounts and the potential cash flows generated by the potential liquidation of the assets under current market conditions. REs are not intended to represent the actual recovery noteholders may get upon sale of the underlying vessels or potential restructuring of the notes.

Additional information is available at www.fitchratings.com.

Sources of Information:

In addition to the sources of information identified in the criteria for rating oil-vessel backed financing in Latin America, this action was additionally informed by notifications and reports provided by Deutsche Bank, as Indenture Trustee of Lancer and Schahin II, and Petrobras notifications to the Brazilian courts in charge of the Schahin bankruptcy proceedings notifying the cancellation of the contracts.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781

Criteria for Rating Oil Vessel-Backed Financing in Latin America (pub. 18 Dec 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=834309

Global Structured Finance Rating Criteria (pub. 31 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864268

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985423

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150527006680/en/

Fitch Ratings
Primary Analyst:
Cinthya Ortega, +1-312-606-2373
Director
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Committee Chairperson:
Jayme Bartling, +55-11-4504-2601
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• China's 1st Full-stack MRI-Based BCI Solution Released in Tianjin
• Lee Michael Generous: Insights on Navigating Complex Tax Challenges
• Bitdefender Named Executive Partner of prpl Summit 2026 in Vienna