Moody's upgrades Shelf Drilling

Moody's Investors Service said it upgraded Shelf Drilling Midco, Ltd.’s corporate family rating to Ba3 from B1, probability of default rating to Ba3-PD from B1-PD and senior secured credit facility to B1 (LGD5) from B2 (LGD5) and Shelf Drilling Holdings, Ltd.’s senior secured bonds due 2018 to Ba3 (LGD3) from B1 (LGD3). The speculative grade liquidity rating was affirmed at SGL-2, and the outlook was changed to stable from positive.

Moody's also withdrew the Ba1 rating on Holdings' $75 term loan due 2018 that was recently paid in full and terminated.

"These actions reflect Shelf Drilling's consistent and strong operating performance since late 2012, ability to execute contracts independently with new and existing customers and our expectation of continued commitment to low leverage," Moody's assistant vice president Sajjad Alam said in an agency news release.

"While jackup market fundamentals are expected to weaken in the coming quarters as a large number of rigs are delivered through 2016, Shelf Drilling's $3.4 billion contracted revenue backlog, globally diversified footprint in some of the more active shallow water markets and long-standing relationship with many large oil and gas customers should help maintain above-average utilization and protect credit metrics in a potential downturn."

The agency said the Ba3 corporate family rating reflects Shelf Drilling's low leverage, substantial contract coverage through early 2016, strong utilization rates, excellent cash flow diversification across 35 rigs and global scope of operations.

The Ba3 rating is held back by Shelf Drilling's older generation rig fleet that will face intense competitive pressures in a protracted down market, singular exposure to the volatile jackup sector, limited contract coverage beyond 2016, short operating history as an independent corporate entity and its private equity owners, who will likely look for future distributions to meet their return objectives, Moody’s said.

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