Fitch Downgrades Schahin-Sponsored Oil-Vessel-Backed Transactions; Maintains Negative Watch

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded the notes issued by Schahin II Finance Company (SPV) Limited and Lancer Finance Company Ltd. as follows:

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

--Series 2012-1 senior secured notes due 2023 to 'B-' from 'BB-' ($650 million outstanding).

Lancer Finance Company Ltd. (Lancer Finance)

--Series 2010-1 senior secured notes due 2016 to 'B' from 'BB+' ($80 million outstanding).

The ratings remain on Rating Watch Negative.

The Schahin II notes are backed by flows related to a long-term charter and services agreement signed with Petroleo Brasileiro S.A. (Petrobras) for the use of the dynamically positioned ultra-deepwater (UDW) drillship called 'Sertao'. Schahin Petroleo e Gas S.A. (Schahin P&G), the oil and gas arm of Brazilian-based Schahin group (Schahin), is the operator of the vessel and primary sponsor of the transaction. 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 (Lancer). Schahin Engenharia S.A. is the operator of the drilling rig.

The rating actions reflect: (i) the continued deteriorating credit quality of Schahin; and (ii) the transactions' heightened exposure to current depressed market conditions. Many of the risks faced by Lancer Finance are somewhat mitigated by the transaction's additional liquidity and low leverage levels. The Negative Watch primarily reflects the uncertainty surrounding the temporary suspension of the operations of five vessels within Schahin's fleet and the financial situation of the sponsor group.

KEY RATING DRIVERS

Deteriorating Financial Condition of Schahin: Liquidity constraints, which may affect the company's ability to operate the vessels, potentially impacting overall maintenance, general safety, and uptime performance, have led Schahin to temporarily suspend operations on five drill ships contracted with Petrobras. The company communicated to Petrobras its intention to temporarily suspend the operation of the vessels on April 2, 2015, and Petrobras has stated it is evaluating the appropriate contractual measures. Payment on the Schahin II and Lancer notes mainly relies on the cashflow generation under the charter and services agreement for the operation of Sertao and Lancer, respectively. Therefore, a temporary interruption on the operation of the underlying assets would add additional pressure on the transactions as they would have to rely on the available liquidity inside the structures to meet timely debt service. Furthermore, extended periods of downtime could lead to an early termination of the contracts.

Increased Exposure to Current Depressed Market Conditions: The deteriorating credit quality of Schahin heightens the transactions' exposure to the potential risk of early termination under the charter and services agreements. These transactions are directly and indirectly exposed to sponsor risk as the underlying contracts have termination clauses that include operator bankruptcy and performance weaknesses. If any of these agreements terminate for any reason, the related transactions could be exposed to current depressed market conditions. However, Fitch believes exposure to current market conditions under a contract termination is mitigated to different degrees in each transaction given the different loan-to-value (LTV) levels.

High Liquidity and Low Leverage Support Lancer Finance: The transaction benefits from low leverage as the structured financing has continuously de-levered since closing in 2010. Currently, Fitch conservatively estimates current LTVs to be in the range of 20%-30%, depending on various assumptions. Additionally, the transaction benefits from debt service reserve accounts and opex reserves sufficient to cover timely interest payments for approximately two years in case Lancer is not operating.

RATING SENSITIVITIES

The ratings are sensitive to further deterioration of Schahin's credit quality as sponsor of the transactions, and Petrobras' decision regarding the temporary suspension of the operations of the rigs. Additionally, the transactions are sensitive to the conclusions of the Lava-Jato investigations and their impact on Schahin and the Brazilian oil and gas industry, changes in the credit quality of Petrobras as offtaker and its willingness to honor existing agreements, and the operating performance of the rigs.

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

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (March 31, 2015);

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

--'Petroleo Brasileiro S.A. (Petrobras) - Ratings Navigator' (April 2, 2015);

--'What Investors Want to Know: Lava Jato Implications' (Jan. 29, 2015);

--'Schahin II Finance Company (SPV) Limited' (April 9, 2012);

--'Lancer Finance Company (SPV) Limited Series 2010-1' (Sept. 30, 2010).

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982603

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

Source: Fitch Ratings

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