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Rating Action: Moody's confirms Teekay's B3 CFR; changes outlook to stable
Global Credit Research - 11 Jul 2016
Approximately $595 million of rated debt instruments affected
New York, July 11, 2016 -- Moody's Investors Service, ("Moody's") confirmed the ratings of Teekay Corporation ("Teekay", or "Parent"): Corporate Family Rating ("CFR") at B3 and senior unsecured debt rating at Caa1. Concurrently, Moody's upgraded the Speculative Grade Liquidity rating to SGL-3 (adequate), from SGL-4 (weak). The ratings outlook is stable. This action resolves the review for downgrade initiated on 15 April, 2016.
Moody's has taken the following actions:
Issuer - Teekay Corporation:
Corporate Family Rating, confirmed at B3;
Senior Unsecured Bond/Debentures due 2020, confirmed at Caa1;
Speculative Grade Liquidity rating, upgraded to SGL-3 from SGL-4.
The ratings outlook was changed to Stable from Rating Under Review.
The B3 CFR considers the company's adequate liquidity, following the execution of re/financing initiatives as of June 29, 2016, which resolve Parent-level 2016 refinancing risks (approximately $250 million) and improve its liquidity position over the near term, via increased access to its equity margin revolver (max $150 million) due 2018 and a $100 million equity raise (40% of which is furnished by the Teekay Trusts - Teekay's largest shareholder). The rating also considers Teekay's leading position in its business markets and the largely contracted revenue base in the family's LNG, FPSO and shuttle tankers, which partially offsets its highly leveraged profile on a consolidated basis.
Nonetheless, despite the recent re/financing initiatives, the rating also reflects the Parent's diminished coverage of its financial obligations, given the further decline in total cash distributions it expects to receive from its master limited partnership (MLP) subsidiaries: Teekay Offshore Partners, L.P., "TOO" (unrated), and Teekay LNG Partners, L.P., "TGP" (unrated). Specifically, TOO's expected cash distributions to Teekay of about $18 million per year are now suspended until at least 2018 and will instead be paid in kind via TOO common equity. Distributions to the Parent are not contractually required but have provided support to the rating. As well, the prospects for the equity market values recovering to restore asset coverage of Parent debt closer to historical levels could be weak for some time.
Moody's also anticipates that continued weakness in the underlying energy markets will likely lead to profit margin pressures and continue to weigh on the MLPs' ability to upstream cash to the Parent amidst reducing revolvers, project funding needs (including those prompted by any project delays) and liquidity requirements. This would limit the MLPs' ability to support material debt reduction at the Parent and on a consolidated basis, and prolong the prioritization of cash flows to repaying subsidiary debt over Parent debt. Despite Teekay's planned sale of its very large crude carrier (VLCC) in late 2016 and full repayment of the debt it secures ($50 million), Moody's estimates that Parent leverage (Debt to EBITDA) will remain above 6x over the next year and consolidated leverage at about 6x. Additionally, Moody's believes the Parent provides guarantees on subsidiary obligations of about $1 billion.
The stable outlook reflects Moody's expectation that although end markets will remain weak over the intermediate term, thereby pressuring customers to seek contract concessions at renegotiation or cancellations and squeezing profit margins, Teekay will maintain adequate liquidity over the next year (including over $200 million in unrestricted cash) to cover its G&A expenses and debt obligations. The stable outlook also anticipates no further reductions in the cash distributions or dividends that Teekay expects to receive from its subsidiaries.
The SGL-3 Speculative Grade Liquidity rating reflects the Parent's adequate liquidity, characterized by unrestricted cash of over $200 million, an increase from $140 million currently, pro-forma for the $100 million raised in equity during the recent re/financing initiatives, and expectation of higher pro-forma borrowing availability (about $120 million) under its $150 million equity margin revolving credit facility. However, this facility is secured by Teekay's equity in its subsidiaries and availability would fluctuate with equity market values. On a consolidated basis, cash stood at $658 million and the company had availability of about $200 million across 12 revolvers at 31 March, 2016. About 65 vessels are pledged across the various revolving credit facilities. The committed amounts typically reduce over the life of each facility in step with projected declines in the values of the vessel collateral. Moody's believes that Teekay's complex capital structure makes the rolling or refinancing of these facilities difficult in an environment of challenging end-markets and tight credit conditions. The fulfilment of TOO's intermediate capex funding needs and its $200 million equity issuance during the recent re/financing initiatives, alleviate pressure for a call on the Parent's guarantees of subsidiary debt.
We anticipate that Teekay will maintain compliance with covenants that include covenants for minimum cash or liquidity and hull values, with full access to the revolvers. Five of the company's loan facilities are subject to hull covenants including a mortgage on three of the RasGas II LNG carriers. Alternate sources of liquidity include about five unencumbered mostly older vessels and Teekay's ownership stakes and/or general partner interests in each of the subsidiaries. These assets could secure alternate sources of financing, if necessary, over the intermediate term.
Moody's foresees no upwards ratings momentum near term. However, successful execution of the asset disposal strategy such that Teekay Parent substantially reduces its debt such that Debt to EBITDA approaches 4.0 times, coupled with an increase in the MLP distributions to a level that would enable Teekay Parent to comfortably cover its debt obligations and G&A expenses, could provide positive ratings momentum.
The ratings could be pressured if: (i) Moody's expects cash at Teekay Parent to fall below $200 million, or if any upcoming debt maturities at Parent or the subsidiaries are not refinanced on a timely basis; or (ii) Parent does not fully transfer or repay the secured debt associated with each of its vessels upon their disposal; (iii) there were to be a further decline in the cash distributions received by Parent or an increase in its funded debt; or (iv) if declines in the market capitalizations of the MLP subsidiaries were to be sustained, thereby pressuring the market prices of the Parent's limited or general partnership units. Repurchases of Parent's common shares could also result in a ratings downgrade, if made before a majority of its debt is repaid or assumed by the daughter companies with no contractual recourse to Teekay. Shareholder-friendly actions that compromise debt-holder interests would also drive downward ratings momentum.
The principal methodology used in these ratings was Global Shipping Industry published in February 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
Teekay Corporation ("Teekay" or "Parent") is a Marshall Islands Corporation with headquarters in Bermuda and executive offices in Vancouver, Canada. It a leading project developer and provider of transportation services in the marine midstream space. Through its general partnership interests in two master limited partnerships (MLPs), Teekay LNG Partners L.P. (NYSE: TGP, unrated ) and Teekay Offshore Partners L.P. (NYSE: TOO, unrated), its controlling ownership of Teekay Tankers Ltd. (NYSE: TNK, unrated) and its fleet of directly-owned vessels and offshore units, Teekay is responsible for managing and operating consolidated vessel assets with a book value of about $9.4 billion, comprised of 215 liquefied gas, offshore, and conventional tanker assets, including vessels on order or under conversion, and ownership interests in a number of joint ventures. The company provides a comprehensive set of marine services to the world's leading oil and gas companies. Teekay and its subsidiaries have common management. The subsidiaries have conflict committees to assure transactions between the group's various units are conducted at arm's length. The company reported consolidated revenue of approximately $2.5 billion for the twelve months ended 31 March 2016.