Credit rating downgrades
Moody’s is one of the leading credit rating agencies. It downgraded many offshore drilling (IYE) companies and changed their outlook in the previous week.
Moody’s (MCO) downgraded Rowan Companies (RDC) to B2 from B1 with a “negative” outlook. B2-rated debt is considered speculative and is subject to high credit risk. Moody’s also stated that the downgrade reflects the deteriorating credit metrics through 2018 due to a lower utilization rate and pressured day rates. There’s also uncertainty towards the offshore drilling industry’s recovery. As a result, there’s uncertainty surrounding Rowan’s cash flow and credit metrics.
Moody’s revised Transocean’s (RIG) outlook to “negative” from “stable.” Moody’s gave a negative outlook because it doesn’t view the offshore drilling industry’s recovery, especially for the deepwater segment until at least 2019. As a result, Transocean’s cash flow and credit metrics will likely deteriorate more. Currently, Transocean has an excellent liquidity position. Its revolving credit facility will mature in mid-2019. There’s still concern about the size and structure of Transocean’s revolving credit facility after re-organization. Moody’s also stated that an upgrade isn’t likely for Transocean. It expects Transocean’s financial leverage to increase in the coming years.
Moody’s downgraded Diamond Offshore (DO) to Ba3 from Ba2. It also changed the outlook to “negative” from “stable.” The downgrade came in because Moody’s doesn’t expect a meaningful increase in day rates before mid-2019. There’s a higher risk of decline in Diamond Offshore’s cash flow and credit metrics through 2019. Moody’s also stated that the negative outlook reflects the possibility of a downgrade if there isn’t a meaningful recovery in day rates. There could also be a downgrade due to weak oil prices and an oversupply of deepwater rigs.
In the next part of the series, we’ll discuss analysts’ revised target prices for Diamond Offshore and Rowan Companies.