JULY 13, 2012 —Moody’s Investors Service yesterday affirmed its debt ratings of Teekay Corporation: B1 Corporate Family and B2 senior unsecured. Moody’s also lowered the Speculative Grade Liquidity rating to SGL-3 from SGL-2 and changed the rating outlook to negative from stable.
Moody’s says the negative outlook considers the potential for credit metrics to remain weak for the B1 rating notwithstanding management’s stated intention to use more equity capital when funding future growth investments or sales of assets from the parent to one of the publicly-listed subsidiaries.
The ratings agency says that weak fundamentals in the conventional tanker industry have led to significant operating losses in Teekay’s conventional tanker operations, which have dragged down consolidated earnings and operating cash flow, and maintained pressure on the weak credit metrics profile. Teekay will reduce its exposure to the conventional tanker segment in the upcoming 24 months as a number of in-charters expire. Reducing investment in this segment should lessen the pressure on consolidated earnings and operating cash flows. Moody’s anticipates the Teekay family of companies to continue to pursue asset acquisitions and new projects because of Teekay’s objective to grow the value of its general partner interests in the subsidiaries. How such investments are funded will be an important determinant of whether Moody’s can maintain the current B1 rating.
The lowering of the Speculative Grade Liquidity rating to SGL-3 reflects Moody’s expectation of negative free cash flow generation into at least 2013 with ongoing vessel construction programs. The liquidity assessment also anticipates more modest cash balances and more limited availability on the parent company’s revolving credit facilities and larger expirations of revolver commitments, which will need to be refinanced.
Moody’s says that examining the financial statements of Teekay’s daughter companies “highlights the significant amount of debt Teekay has incurred to transform itself from mainly a crude oil tanker owner and operator to the self-described asset manager that sources projects for the Teekay family of companies. Deployment of capital for contracted long-term, project-like investments in the LNG and offshore segments reduces the variability of operating cash flows over the course of the tanker cycle, but does not guarantee steady earnings growth in all periods. The payout of an overwhelming majority of earnings of the daughter companies to equityholders results in higher leverage in these subsidiaries and is an impediment to a stronger credit profile.”
Moody’s says its B1 Corporate Family Rating reflects Teekay’s position as a leading provider of seaborne transportation of oil and refined petroleum products, the contributions of the fixed-rate fleet that cover its operating and G&A expenses and its adequate liquidity. Moody’s believes that the company’s fleet deployment strategy makes its risk profile stronger than that implied by its particularly high leverage and weak coverage of interest. However, the rating contemplates that Teekay’s strategy to grow its MLP distributions will lead to more acquisitions and sustained high debt balances. Lower losses in the conventional tanker operations, earnings expansion as recently acquired or completed vessels enter revenue service in upcoming quarters and moving certain assets into joint ventures should contribute to improving credit metrics.
The ratings may be downgraded if Teekay does not strengthen its credit metrics. Moody’s will look for Debt (net of restricted cash) to EBITDA to fall below 7.0 times and EBIT to interest to exceed 1.1 times by the December 31, 2012 measurement period, and further improvements thereafter.
Moody’s expects Teekay to invest in additional projects with the passage of time. Moody’s could downgrade the ratings if pursuit of these new investments does not allow for the de-levering at either the subsidiary or consolidated Teekay levels.
Repurchases of the parent company’s common shares could also result in a ratings downgrade as could a sustained decline in the parent company’s unrestricted cash to below $125 million or the inability of the parent or a subsidiary to timely refinance upcoming maturities under any of the 14 revolving credit facilities. There is no upwards pressure on the ratings because of the current credit metrics profile. Significant strengthening of credit metrics would be required before Moody’s would consider a change in the outlook to positive.