Moody's downgrades Key Energy

Moody's Investors Service said it downgraded Key Energy Services, Inc.'s corporate family rating to B3 from B1, probability of default rating to B3-PD from B1-PD and $675 million 6¾% senior notes to Caa1 (LGD5) from B2 (LGD4). The SGL-3 speculative grade liquidity rating was affirmed, and the outlook remains negative.

"The downgrade reflects a sharp increase in Key Energy's leverage caused by recent weak operating performance and a 24% increase in debt following its refinancing transaction announced on June 1, 2015 that will push leverage and debt service costs to a very high level in a challenging industry environment," Sajjad Alam, Moody's assistant vice president and analyst, said in an agency news release. "Moody's expects low oil and natural gas prices to keep upstream customer demand at depressed levels limiting Key Energy's cash flow generation and deleveraging through 2016."

The negative outlook reflects significant ongoing cash expenditures (about $59 million as of the first quarter of 2015) associated with the ongoing Foreign Corrupt Practices Act investigations, the uncertainty around final resolution of these legal matters and the severity of any potential penalties or fines, Moody’s said.

Moody’s said the B3 corporate family rating reflects Key Energy's very high financial leverage, exposure to the highly cyclical drilling and oilfield services industry, which is in the midst of a severe downturn, and declining equipment utilization, margins and cash flow trends.

The B3 corporate family rating is supported by Key Energy's leading industry position in the well-servicing rig segment, diversified well-site service offerings and meaningful market share in a number of service segments, long-standing operating relationships with many highly rated upstream customers and wider geographic reach compared to smaller, regional oilfield services competitors, the agency said.

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