Fitch Expects to Rate Odebrecht Drilling Norbe VIII / IX Ltd.’s 2010-1 Notes ‘BBBsf’

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings expects to assign the following rating to the proposed issuance of 2010-1 notes by Odebrecht Drilling Norbe VIII / IX Ltd. (Odebrecht Drilling), a Cayman Islands Special Purpose Vehicle (SPV):

--US$1,485,279,000 2010-1 notes 'BBBsf'; Outlook Stable.

Fitch's expected rating addresses the likelihood of timely payment of interest and ultimate payment of principal by legal final maturity in June 2022 (expected maturity in June 2021). This expected rating does not incorporate Fitch's full legal analysis as this process is currently in process.

The notes are backed by two intercompany loans granted to Odebrecht Drilling Norbe VIII LLC (Norbe VIII LLC) and Odebrecht Drilling Norbe IX LLC (Norbe IX LLC), which are Delaware SPVs. Each individual Delaware entity owns a dynamic positioning ultra-deepwater drillship that will be chartered to Petroleo Brasileiro S.A. (Petrobras) for a period of 10 years. The rights to the charter agreements have been assigned as collateral to secure the intercompany loans on a cross-collateralized basis. Odebrecht Oleo e Gas S.A. (OOG), sponsor of the transaction, will remain as operator of the vessel. Deutsche Bank Trust Company Americas, as collateral agent to the intercompany loans, will be assigned a collateral package that includes a pledge of the shares of the Delaware entities, as well as mortgages on the vessels.

Fitch considered the following factors in its credit analysis: the completion risk of the vessels and the track record of Daewoo Shipping and Marine Engineering (DSME) as builder of oil rigs, the strategic importance of the Brazilian oil and gas industry, Petrobras' role as off-taker to the charter agreements (Petrobras Foreign Currency Issuer Default Rating [IDR] 'BBB' / Local Currency IDR 'BBB+'), the lack of operating track record of the vessels and of OOG as operator, the degree of refinancing risk, liquidity, overall leverage, and the structural features in place.

Fitch believes the completion risk imbedded in the transaction is consistent with the 'BBB' expected rating. According to the DSME August 2010 progress report, the Norbe VIII vessel is 95.5% complete and is expected to be delivered in January 2011. The Norbe IX vessel is 88% complete and is expected to be delivered in April 2011. Commissioning for both vessels has already begun. In addition, the charter agreements provide delay buffers of approximately six months. A liquidity reserve, the insurance package and additional guarantees are also in place to mitigate completion risk.

Asset quality analysis considered the strategic importance of the local oil and gas industry to the Federal Government of Brazil and Petrobras' investment plans. Recent regulations and initiatives taken by both entities, including minimum Brazilian content requirements for new services and supplies for Petrobras, seek to promote the vertical development of the local oil and gas industry and reduce Petrobras' dependency on international suppliers and service providers. These initiatives consequently mitigate potential decreases to the market value of the Brazilian-operated vessels, since the expectation is that drilling activities in Brazil will remain strong, reducing the exposure of charter day rates for drilling in Brazilian waters to shifts in the global supply and demand of drilling rigs.

The lack of operating track record for both vessels as well as OOG as operator is a negative aspect of the credit analysis. Since Petrobras will only make payment as long as the vessels are available to operate, uptime operating performance is an important element of the analysis. Fitch used historical data on first-year oil rigs chartered to Petrobras to formulate a conservative expectation of operating performance for the first 1.5 years of operation for the vessels (90%). Fitch expects the vessels to operate at the 95% uptime level throughout the following years.

The transaction is exposed to refinancing risk, as the debt does not fully amortize during the life of the charter and services agreements. The structural features in place and the quality of the assets should however mitigate this risk. It is expected that OOG will setup refinancing of the outstanding debt amount in December 2018, 2.5 years prior to transaction expected maturity. If such refinancing is not setup then, it is expected, under base case scenarios, that net debt outstanding in June 2021 (expected maturity of the transaction), will be equivalent to approximately US$255 million, or 14% of the discounted cash flow valuation of the vessels. The transaction benefits from a one-year additional tail to dispose of the vessels and pay the outstanding principal and accrued interest amounts.

The transaction benefits from average Debt-Service Coverage Ratios (DSCRs) of 1.25 times the interest and targeted principal amortization and from reserve accounts sized to cover one interest and principal amortization. These provide adequate liquidity mechanisms to protect against event risks that could potentially be followed by extended periods of down-time. In addition, the transaction can defer principal payments if necessary. The cross-collateralization feature of both vessels provides additional liquidity protection.

Discounted cash flow valuations of the vessel indicate a loan-to-value (LTV) ratio of approximately 80% at issuance. The high leverage on the vessels is compensated by the fact that the Norbe vessels have an expected economic life of 40 years and are built with the most advanced equipment technology and structure suitable for ultra-deepwater drilling. The embedded demand for vessels of this nature mitigate potential volatility of its market value compared to other drilling rigs operating in Brazilian waters. Fitch submitted the transaction to several scenarios of vessel downtime and increasing operating expenses in combination to discounted cash flow valuations under scenarios of depressed market charter day rates. Resulting LTV ratios in the order of 15%-40% in June 2021 do not constrain the 'BBB' rating.

While the transaction's rating is not directly linked to OOG's credit quality, Fitch views the Odebrecht group's credit profile and its relationship with Petrobras as important qualitative element of the analysis. The local and foreign currency ratings assigned to Construtora Norberto Odebrecht (CNO), the group's main operating company, at 'BBB-', is an important consideration. Fitch believes the economics of the projects would leave them inclined to honor debt service payments in the occurrence of certain events. The economic loss resultant of investors executing the mortgage on the vessels is relatively large considering the project's ability to generate cash flows throughout the next 40 years.

Other important structural features considered include charter payments collected through offshore collection accounts controlled and allocated by the collateral agents as well as DSCR triggers and certain debt acceleration events.

A detailed description of the criteria applied in the analysis is provided in Fitch's Presale Report entitled 'Odebrecht Drilling Norbe VIII / IX Ltd. - Series 2010-1' available at 'www.fitchratings.com'.

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

Sources of information used to assess this rating were Banco Santander, HSBC, White & Case, and Odebrecht Oleo e Gas S.A.

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria

Rating Criteria for Infrastructure and Project Finance

Odebrecht Drilling Norbe VIII / IX Ltd. Series 2010-1 (ABS)

Applicable Criteria and Related Research: Odebrecht Drilling Norbe VIII/IX Ltd., Series 2010-1

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=570505

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345

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Fitch Ratings
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Director
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Senior Director
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Source: Fitch Ratings