S&P downgrades Key Energy

Standard & Poor's said it lowered its corporate credit rating on Key Energy Services Inc. to B+ from BB and placed all ratings on CreditWatch with negative implications in response to Key's announcement that it will not file its 10-K for the year ended Dec. 31, 2003 by the March 30, 2004 extended deadline.

Other ratings lowered include Key Energy Services' senior secured debt and senior unsecured debt, both to B+ from BB, and subordinated debt to B- from B+.

S&P said the unexpected filing delay relates to Key's continued internal review by its audit committee of additional write-downs of certain oil-field services assets that have ballooned to at least $83 million from an initial estimate of $55 million in mid-March 2004.

S&P said Key Energy's announcement indicates a lack of oversight by management, weak financial reporting, and inadequate internal controls. The abrupt and dramatic nature of the announcements regarding the company's inability to file year-end financials and the subsequent adverse affect on liquidity due to provisions under Key's loan agreements has left the company facing a potential near-term liquidity crisis.

Specifically, S&P said, the inability to file its 10-K in the required time frame prevents Key from drawing on its $175 million credit facility, as well as putting the company in technical default under its bank credit agreement.

Key Energy is in discussions with the lead bank and the banking syndicate for its revolving credit facility to obtain a waiver of the facility's requirements and forestall acceleration of about $87.2 million outstanding under its credit facility as of March 26, 2004. Failure to receive such waivers would deny Key Energy access to its credit facility and of greater risk could trigger acceleration of debt payments under the bank facility and/or note offerings.

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