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Transocean Poseidon Limited — Moody's downgrades Transocean's CFR to Caa3; negative outlook

Rating Action: Moody’s downgrades Transocean’s CFR to Caa3; negative outlook

Global Credit Research – 14 Aug 2020

Approximately $9 billion of rated debt affected

New York, August 14, 2020 — Moody’s Investors Service, (“Moody’s”) downgraded Transocean Inc.’s (Transocean) Corporate Family Rating (CFR) to Caa3 from Caa1, Probability of Default Rating (PDR) to Caa3-PD from Caa1-PD, and senior unsecured notes rating to C from Caa3. Concurrently, Moody’s also downgraded Transocean’s senior secured revolving credit facility to B3 from B1, senior secured notes issued by various Transocean’s subsidiaries to Caa1 from B2 and previously-issued priority guaranteed senior unsecured notes (PGNs) to Ca from Caa2. Transocean’s Speculative Grade Liquidity (SGL) rating was downgraded to SGL-3 from SGL-2. The rating outlook remains negative.

On August 10 Transocean announced that it had commenced exchange offers to exchange the existing senior unsecured notes for up to an aggregate principal amount of $750 million of the New Senior Guaranteed notes. Transocean also announced that it executed private exchange agreements relating to approximately $397 million of its 0.5% Exchangeable bonds due 2023 for $238 million of newly issued 2.5% Senior Guaranteed Exchangeable bonds due 2027. [1] In addition to exchanging a portion of the company’s debt at a significant discount to par, the Senior Guaranteed Exchangeable bonds and New Senior Guaranteed Notes would structurally subordinate the company’s existing PGNs and senior unsecured notes. If consummated in the amounts proposed, the contemplated exchanges will be viewed as distressed exchanges, a form of default under Moody’s view. In that event Moody’s will append an /LD to the PDR indicating limited default.

“Transocean’s announcement to engage in the proposed debt exchanges indicates the fundamental challenges its business faces and untenable nature of its capital structure. The oil price collapse following the onset of the coronavirus pandemic poses a substantial challenge for Transocean to improve its cash flow and its weak credit profile, as near-term improvement of offshore fundamentals is unlikely” commented Sreedhar Kona, Moody’s senior analyst. “The anticipated gradual erosion of Transocean’s liquidity contributed to the downgrade and continued negative outlook.”

RATING RATIONALE

Transocean’s downgrade to Caa3 CFR and Caa3-PD PDR reflects the company’s rising risk of default in light of its very high financial leverage, diminishing liquidity and Moody’s view on overall recovery on the company’s debt. The downgrade also considers the challenging offshore drilling fundamentals and limited prospects for the company to improve its cash flow generation and very weak credit metrics.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on Transocean of the deterioration in credit quality it has triggered, given its exposure to oil prices, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.

Moody’s expects Transocean to maintain adequate liquidity as reflected in its SGL-3 rating (per our anticipated gradual erosion of its good liquidity reflected in its previous SGL-2 rating), because of its still sizable cash balance and borrowing availability under its credit facility. As of June 30, 2020, the company had $1.5 billion of cash and full availability under its $1.3 billion senior secured revolving credit facility, which Moody’s expects will be modestly drawn upon in 2021. The credit agreement contains several financial covenants including maximum debt to capitalization ratio of 0.60:1.00, minimum liquidity of $500 million, minimum guarantee coverage ratio of 3.00x and minimum collateral coverage ratio of 2.10x. Moody’s expects the company will remain in compliance with its covenant requirements although cushion for compliance will erode going forward. Asset sales are unlikely, given the market conditions for offshore drilling rigs, but could occur to raise some cash since some of the company’s assets are unencumbered.

The B3 rating on Transocean’s revolving credit facility reflects its superior position in Transocean’s capital structure relative to the guaranteed unsecured notes and the unsecured notes, given its security interest in some of Transocean’s rigs and strong collateral cushion in the form of a 2.1x collateral coverage ratio covenant requirement.

The Guardian Notes, the Pontus Notes, the Poseidon Notes and the Sentry Notes are rated Caa1, two notches above the Caa3 CFR and one notch below the revolver’s B3 rating. The Caa1 rating reflects these Notes’ respective security interest in only one or two drillships, as applicable, and the cash flow generated from their drilling contracts, and the potential for any residual claims from these Notes to become subordinated to secured claims at Transocean, which has provided unsecured guarantee to these notes.

The Ca rating on PGNs is one notch below the Caa3 CFR, reflecting the secured debt previously issued, the to be issued New Senior Guaranteed notes (unrated) and the Senior Guaranteed Exchangeable bonds (unrated), to which the PGNs are structurally subordinated. The PGNs are senior to the unsecured notes and have a priority claim, because of the guarantees from certain of Transocean’s intermediate holding company subsidiaries, effectively giving these notes a priority claim to the assets held by Transocean’s operating and other subsidiaries compared to Transocean’s remaining senior unsecured notes.

Transocean’s remaining senior unsecured notes are rated C, reflecting their lack of security or subsidiary guarantees, leaving them at the bottom of the capital structure in terms of priority.

The rating outlook is negative, reflecting the continued oversupply of deepwater and ultra-deepwater rigs reducing the likelihood of sufficient dayrate improvement and increase in cash flow for Transocean.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Transocean’s ratings could be downgraded if Moody’s view on the company’s overall debt recovery or specific debt instrument recovery is reduced.

An upgrade is unlikely in the near term, absent a substantial recovery in dayrates, increase in cash flow and reduction in financial leverage. If Transocean can achieve sequential increases in EBITDA in an improving offshore drilling market while increasing liquidity, reducing leverage and increasing interest coverage above 1x, an upgrade could be considered.

Transocean Inc. is a wholly-owned subsidiary of Transocean Ltd., a leading international offshore drilling contractor operating in every major offshore producing basin around the world.

The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062654. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Downgrades:

..Issuer: Transocean Guardian Limited

….Senior Secured Notes, Downgraded to Caa1 (LGD2) from B2 (LGD2)

..Issuer: Transocean Inc.

…. Probability of Default Rating, Downgraded to Caa3-PD from Caa1-PD

…. Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

…. Corporate Family Rating, Downgraded to Caa3 from Caa1

….Senior Secured Revolving Credit Facility, Downgraded to B3 (LGD2) from B1 (LGD2)

….Gtd. Senior Unsecured Notes (PGNs), Downgraded to Ca (LGD5) from Caa2 (LGD4)

….Gtd. Senior Unsecured Notes, Downgraded to C (LGD6) from Caa3 (LGD5)

….Senior Unsecured Notes, Downgraded to C (LGD6) from Caa3 (LGD5)

..Issuer: Transocean Pontus Limited

….Senior Secured Notes, Downgraded to Caa1 (LGD2) from B2 (LGD2)

..Issuer: Transocean Poseidon Limited

….Senior Secured Notes, Downgraded to Caa1 (LGD2) from B2 (LGD2)

..Issuer: Transocean Sentry Limited

….Senior Secured Notes, Downgraded to Caa1 (LGD2) from B2 (LGD2)

Outlook Actions:

..Issuer: Transocean Guardian Limited

….Outlook, Remains Negative

..Issuer: Transocean Inc.

….Outlook, Remains Negative

..Issuer: Transocean Pontus Limited

….Outlook, Remains Negative

..Issuer: Transocean Poseidon Limited

….Outlook, Remains Negative

..Issuer: Transocean Sentry Limited

….Outlook, Remains Negative

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Transocean Press Releases 10-Aug-2020

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sreedhar Kona Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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