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Wednesday August 12, 12:17 pm Eastern Time
Company Press Release
SOURCE: Standard & Poor's CreditWire
R&B Falcon's Ratings Affirmed; Cliffs Drilling Put on Standard & Poor's Watch
NEW YORK, Aug. 12 /PRNewswire/ -- Standard & Poor's today affirmed its triple-'B'-minus corporate credit and senior unsecured debt ratings on R&B Falcon Corp. Standard & Poor's also affirmed its double-'B'-plus subordinated debt rating on the company. The outlook is positive.
At the same time, Standard & Poor's placed its single-'B'-plus corporate credit and senior unsecured notes ratings on Cliffs Drilling Co. on CreditWatch with positive implications.
These actions follow yesterday's announcement of an intended merger between contract drilling companies R&B Falcon and Cliffs Drilling Co. The stock-for-stock transaction would add a modest-sized fleet of predominantly commodity jack-up rigs to R&B Falcon's already large, diversified drilling rig fleet. Standard & Poor's expects to equalize Cliffs' ratings with those of R&B Falcon upon the close of the transaction.
The ratings reflect R&B Falcon's well-diversified drilling rig fleet that affords the company good visibility of revenues and cash flows. This is offset by an ambitious, debt-financed expansion program, an aggressive capital structure, and the financial risk inherent in the worldwide energy contract drilling industry. R&B Falcon was formed by the late-1997 merger of Reading & Bates Corp. and Falcon Drilling Co. Inc. R&B Falcon's strategy is to maintain a marine drilling rig fleet that is diversified in terms of geography, environmental capabilities, and equipment type.
R&B Falcon participates in all major global drilling markets and derives a significant proportion of cash flow from long-term contracts, including some at premium prices. This partially offsets the company's exposure to regional downturns. Many units can operate in harsh environments and deep water, which adds some stability to utilization rates. The addition of Cliffs' presence in Venezuela, Trinidad, and the Arabian Gulf (about 60% of 1997 revenues) should further enhance R&B Falcon's international diversification. In the shallow water U.S. Gulf of Mexico -- where the combined company will control about a quarter of the overall jack-up fleet -- recent day and utilization rates have been extremely volatile and contract terms short. The merger increases R&B Falcon's participation in this market. But it also affords the company increased flexibility in use of its rigs there and may provide some insulation from Gulf of Mexico pricing vicissitudes. This strategy is consonant with R&B Falcon's activities in the barge drilling market. R&B Falcon is also in the midst of an aggressive debt-financed construction program, building several dynamically positioned drillships covered by long-term contracts with creditworthy customers. The company recently announced delivery delays on some of these ships. Costs associated with these delays are expected to be about $50 million. Standard & Poor's does not expect R&B Falcon to generate free cash flow until the ships commence operations, although profitability and cash flow protection measures should be adequate for the rating category, with pretax interest coverage above 5 times, and funds from operations to total debt at 30%-40%. R&B Falcon's capital structure is expected to remain aggressive, with debt leverage in the upper 50% area. Only moderate improvement is expected in the next several years, primarily from earnings retention.
OUTLOOK (R&B FALCON CORP.): POSITIVE
Completion of R&B Falcon's construction projects should substantially boost contracted revenues and cash flows, allowing the company to materially reduce debt and better weather market downturns. Still, the extent of additions to the aggregate supply of offshore drilling rigs remains a material risk factor for the industry and limits the extent of potential ratings improvement, Standard & Poor's said. -- CreditWire
SOURCE: Standard & Poor's CreditWire
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and News: Cliffs Drilling Co (NYSE:CDG - news)
R&B Falcon Corp (NYSE:FLC - news)
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