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S&P Global Ratings affirmed the ‘CCC’ issuer credit and senior unsecured ratings on Weatherford International plc, and at the same time it affirmed the ‘B-’ rating on the expanded letter of credit (LOC) facility.

“We have assigned a ‘B-’ senior secured rating to the $500 first-lien senior secured notes due 2024. The recovery is ’1′, indicating our expectation of very high (90%-100%; rounded estimate: 95%) recovery in the event of a payment default. We are withdrawing the ratings on the company’s $450 million asset-backed loan facility (ABL), which is replaced with proceeds from the $500 million senior secured notes,” S&P said.

The senior secured note issuance supports liquidity at a time of declining receivables and inventory levels. The senior secured notes will replace the company’s ABL, on which borrowing capacity had shrunk to about $234 million ($90 million available after $123 million LOCs and $20 million borrowings) as of June 30, 2020, from about $376 million on Dec. 31, 2019, due to weak market conditions and the resulting effects on receivable and inventory levels. Based on this, S&P estimates the senior secured notes will provide about $350 million of incremental liquidity. The replacement of the ABL will also resolve potential covenant violations in the first half of 2021, as well as allow for cash collateralization of certain of the LOCs that were under the ABL.

“We continue to believe a distressed debt transaction could occur given Weatherford’s high debt leverage and our expectation for weak capital and operating markets for the industry as a whole. The company’s senior unsecured notes continue to trade at a material discount to par, and, in our view, are likely to do so until a sustained material improvement in market conditions occurs, most likely due to consistent crude oil prices comfortably above $45 per barrel that supports increased spending by the exploration and production (E&P) industry. As a result, we continue to believe Weatherford could pursue a deleveraging transaction that we would view as distressed and tantamount to a default, as it seeks to better align debt levels to market conditions,” S&P said.

The negative outlook reflects S&P’s expectation for continued weak market conditions across the oilfield services industry that results in unsustainable debt leverage for Weatherford, and what we consider a heightened risk the company could pursue a distressed transaction over the next six-12 months, such as a debt exchange or other like transaction to lower debt levels.

“We could lower our rating on Weatherford if it announces a debt refinancing or other transaction we view as distressed. This would most likely occur over the next six-12 months if market conditions for oilfield services fail to improve significantly,” S&P said.

“We could raise the ratings if we no longer believe a potential distressed exchange is likely within the next 12 months, most likely due to significantly improved market conditions that drive stronger cash flows to support Weatherford’s debt level,” S&P said.