August 28, 2008
Standard & Poor's lowers Teekay Corp. ratings
Standard & Poor's Ratings Services yesterday said it lowered its ratings, including the long-term corporate credit rating, on Vancouver, B.C.-based Teekay Corp. to 'BB' from 'BB+'. The outlook is stable.
At the same time, Standard & Poor's lowered its issue rating on the company's US$350 million senior unsecured bonds maturing July 2011 to 'BB' (the same as the corporate credit rating on Teekay) from 'BB+', and revised the recovery rating to '3' from '4'. The '3' recovery rating indicates the expectation of meaningful (50%-70%) recovery in the event of payment default. As at June 30, US$226 million of these bonds remains outstanding.
"The downgrade reflects Teekay's weakened financial risk profile from the company's aggressive use of debt to finance its acquisitions and expand its fleet, as well as its exposure to the volatile spot tanker industry," said Standard & Poor's credit analyst Greg Pau. "Partially mitigating these risks are Teekay's market-leading and defendable position in the shuttle tanker business, increasing revenue contribution from more stable liquefied gas and offshore segments, a strong customer base, and a young fleet," Mr. Pau added.
Standard & Poor's said that "Teekay has delayed its debt reduction and because of debt-financed acquisitions and new vessel purchases, its financial measures deteriorated. The company intends to resume reducing debt with its cash flow generation, in addition to issuing equity at its subsidiaries and disposing of some of its vessels. However, its ability to do so depends on investor appetite and conditions in the equity and vessel markets, both of which are largely beyond the company's control. The current financial measures are weak for the revised rating level, reflecting our expectation of continued debt reduction within the company's internal gearing targets for each of its businesses in the coming year."
Teekay has a leading market share in the shuttle tanker segment that, says Standard & Poor's "should be defendable given its capital intensity, protection from long-term contracts, strong track record, and customer relationships. The company's market position is supported by an extensive and young 163-vessel fleet. Teekay's exposure to the volatile spot market should decrease over time as a large proportion of the recently acquired vessels and newbuildings operate under fixed-rate, long-term contracts."
"The stable outlook reflects Teekay's strengthened product offering and market positions," says Standard & Poor's. "However, its current financial risk profile is weak for the rating and it's crucial the company improve it in the near term. The outlook also reflects our expectation that Teekay's adjusted debt to EBITDA will fall below 6x and adjusted funds from operations (FFO) to debt will reach 20% in the next 12 months through the company's deleveraging efforts. We could revise the rating or outlook on the company downward if its debt reduction plan falls materially short of our expectations. Conversely, we could revise the rating or outlook upward when the company improves its adjusted debt to EBITDA to below 5.0x and adjusted FFO to debt to above 20%, while maintaining its strong market positions and reducing its exposure to the spot tanker business."
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