NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Seacor Holdings Inc. (SEACOR) at 'B', and revised the Rating Outlook to Negative from Stable. The downward revision in Outlook reflects Fitch's view that the offshore support vessel down-cycle may be prolonged, causing SEACOR's credit metrics to remain highly elevated until at least 2018.
Recovery in the off-shore sector will be delayed given persistently low oil prices, high break-even oil prices needed to spur off-shore capex spending and drilling, global over-supply of rigs and vessels and opaque visibility regarding contracting trends.
SEACOR reported debt/EBITDA of 8.9x in the last 12 months (LTM) of Sept. 30, 2016 compared to 5.3x for the same period in 2015. Fitch's base case forecasts that SEACOR's mid-cycle leverage metric excluding non-recourse SEA-Vista debt will remain well above 9.0x over the forecast period.
SEACOR's ratings reflect adequate liquidity that consists of $471.2 million of unrestricted cash as of Sept. 30, 2016. SEACOR's financial policy has always been to maintain large cash balances to withstand sector volatility, and to opportunistically capitalize on asset purchases during cyclical downturns. However, Fitch anticipates potential cash outlays in 2017 that could reduce cash balances below historical norms.
KEY RATING DRIVERS
WEAK OFFSHORE OILFIELD SERVICES MARKET
Offshore services is a key driver of Seacor's fundamentals, and historically contributed approximately 50% to 60% of annual EBITDA. In 2015, Offshore Marine Services' (OMS) contribution declined to 16% of EBITDA, and was a negligible contributor as of LTM Sept. 30, 2016. The outlook for offshore oilfield services remains extremely weak, as rig demand will be softer over the medium term. E&P companies continue to focus on balancing capital spending with cashflows without sacrificing their balance sheets. This means that capex has slowed in response to an uncertain price environment. Seacor's exposure to the offshore market is primarily in North America/Gulf of Mexico, where there is an oversupply of vessels, and companies require $60-$65/barrel oil on average to economically commence drilling projects. Despite some slight pick-up in capex spending by E&Ps expected in the near term, it is Fitch's view that the onshore shale segment will benefit first, with a lag in offshore expected. Utilization rates and day rates for SEACOR (ex. Wind-Farms) continue to slacken. Average fleet utilization (excluding wind-farm) dropped to 47% as of Sept. 30, 2016 from 63% in the same period a year ago. Day rates have dropped 25% from $13,708/day to $10,336/day in the same period. SEACOR's fleet renewal strategy of building, trading, and upgrading vessels to maintain a younger, high-grade fleet should position it well for a recovery, when it ultimately occurs. Since Fitch anticipates that offshore rig demand will lag a recovery to supportive oil price levels by at least six to 12 months, positioning a recovery in oilfield services pivots to late 2018/early 2019 based on Fitch's current price deck of a long-term price assumption of $65/barrel post 2019.
SEGMENT DIVERSIFICATION PROVIDES COUNTERBALANCE
SEACOR benefits from its business diversification strategy, which continues to offset weaker OMS results. The Inland River Services (IRS) segment had historically experienced better results due to strong crop yields and large grain export program, while the Shipping Services (SS) segment has been buoyed by improving demand for U.S.-flagged product tankers. Fitch believes that the company's vessel and business diversification strategy should continue to be a counterbalance, but weak commodity prices could act as a headwind to production-linked vessel activity, although outlook for petrochemicals and other liquids is promising. Furthermore, IRS is expected to experience some near-term softness driven by weather conditions, competition for vessels from other commodities (coal and frack sand), and a strong dollar, which would be negative for crop exports. On a consolidated basis, and during the forecast period, Fitch estimates that SEACOR will incrementally benefit from the SS segment driven by delivery of two already chartered Sea-Vista tankers in 2016 and a third vessel in 2017, which should help to counteract the deep downturn in the OMS segment. Finally, while Illinois Corn Processing (ICP) has also experienced some softness due to weaker corn-based ethanol margins, none of the other segments has been as negatively impacted as OMS, thereby shielding SEACOR on a consolidated basis from the deep slump in the offshore drilling sector.
LEVERAGE PROFILE PRESSURE FORECASTED
Leverage metrics are anticipated to be pressured by weaker EBITDA results with debt/EBITDA metrics, excluding non-recourse SEA-Vista debt, forecast to be 18.8x, 11.1x, and 9.1x, respectively, in 2016, 2017, and 2018. Capital spending, excluding the three new-builds to be funded by its non-recourse SEA-Vista affiliate, should remain manageable over the medium term. SEACOR does not have major capital commitment obligations at the moment. The base case assumes continued security repurchases linked to the Board of Directors previously approved securities repurchase plan that authorizes the company to acquire securities through open- market purchases, or privately negotiated transactions. On Feb. 26, 2016, SEACOR's Board of Directors increased the company's repurchase authority for the securities repurchase program to $200 million. As of Sept. 30, 2016, the company's repurchase authority for the securities was $64.8 million, following repurchase activity of the 2.50% senior unsecured convertibles and the 7.375% senior unsecured notes at various points in 2016.
ADEQUATE NEAR-TERM LIQUIDITY POSITION
SEACOR's financial policy has always been to maintain large cash balances to withstand sector volatility, and to opportunistically capitalize on asset purchases during cyclical downturns. The company had cash and equivalents, restricted cash, marketable securities, and construction reserve funds of $715.2 million, as of Sept. 30, 2016. Fitch notes that of the total liquidity, $161.9 million is comprised of restricted, non-fungible construction reserve funds, $78.7 million of marketable securities, and $3.4 million of restricted cash. Other sources of liquidity are at the asset level under the ICP revolving credit facility, the Sea-Vista revolver, and term loan facilities, which are non-recourse, non-guaranteed, and without cross-default or cross-acceleration clauses to SEACOR.
MANAGEABLE NEAR-TERM MATURITIES PROFILE
The company has modest scheduled annual maturities through 2018 that represent principal repayments on asset-specific mortgages, among other indebtedness. The most significant scheduled maturity over the next five years is the remaining $173.4 million in 7.375% senior notes due 2019 Fitch notes that the first put date for the 2.5% senior convertible notes is in December 2017 and the conversion option is currently out-of-the-money based on the conversion price relative to where SEACOR's stock is trading. Total outstanding amount of the 2.5% senior convertible notes is $167.1 million. In addition, to the extent that the Seacor Marine Holdings spin-off does not occur prior to Dec. 1, 2017, the holders of the 3.75% subsidiary convertible senior notes of 2022 may require SEACOR to purchase for cash all or part of the notes at par on that date; however, if the SMH spin-off is consummated, this put option of $175 million would immediately terminate. In total, SEACOR has a total of $356 million that could be put back to the company by year-end 2017.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--Continued weakness in OMS segment results in lower utilization and day rates with an estimated market inflection point in 2019.
--IRS segment assumed to exhibit weaker results near term driven by lower freight rates, and vessel oversupply.
--SS segment cashflow growth given the scheduled delivery of chartered SEA-Vista new-builds in 2016 and 2017. Stable margins for SS throughout the forecast period.
--ICP margins revert to mean levels resulting in typically modest cashflow contributions.
--Asset sales assumed to be challenged relative to historical trends.
--Capital spending forecast balanced with near-term capital commitments.
--Share buybacks and security purchases assumed to be more measured in order to retain adequate liquidity with projected levels of $65 million utilized between 2016 and 2017.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Improvements in the offshore oil & gas market that result in OMS utilization and day rate tailwinds;
--Continued execution of management's favorable fleet strategy that maintains manageable balance sheet and adjusted debt metrics;
--Maintenance of financial flexibility and balanced approach to shareholder initiatives;
--Mid-cycle debt/EBITDA, excluding non-recourse SEA-Vista debt, around 5.0x on a sustained basis.
Fitch believes positive rating actions are unlikely over the near term given the expected market headwinds for offshore support vessels, and forecasted leverage profile.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Prolonged offshore oil & gas market downcycle that continues to weaken OMS utilization and day rate outlook beyond already depressed levels;
--Significant shifts in commodity transportation and consumption dynamics that further lowers IRS and SS volume and price expectations;
--Robust asset-level financing structures that lead to a dilution of asset quality and heighten cash flow risks;
--Heightened level of share repurchases and/or commencement of dividend payments inconsistent with the expected cashflow profile;
--Material decline in liquidity position that hampers financial flexibility such as the exercise of the put option by the holders of the 3.75% subsidiary convertible senior note.
Rating actions will be closely linked to management's ability to manage its leverage profile and maintain financial flexibility in a prolonged weaker offshore support vessel market environment.
LIQUIDITY
SEACOR's financial policy has always been to maintain large cash balances to withstand sector volatility, and to opportunistically capitalize on asset purchases during cyclical downturns. The company had cash and equivalents, restricted cash, marketable securities, and construction reserve funds of $715.2 million, as of Sept. 30, 2016. Fitch notes that of the total liquidity, $161.9 million consists of restricted, non-fungible construction reserve funds, $78.7 million of marketable securities, and $3.4 million of restricted cash.
FULL LIST OF RATING ACTIONS
Seacor Holdings, Inc.
--Long-Term IDR affirmed at 'B', Outlook revised to Negative from Stable;
--Senior unsecured notes affirmed at 'B+/RR3'.
Summary of Financial Statement Adjustments
Fitch has made no material adjustments that are not disclosed within the company's financial statements.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016)
https://www.fitchratings.com/site/re/890199
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015805
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https://www.fitchratings.com/regulatory
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