Ensign Drilling Drowns on Distressed Exchange, Gloomy Financial Outlook

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On November 11, 2020, Moody's Investors Service downgraded its corporate family rating on Ensign Drilling Inc. to Caa1 from B3, its probability of default rating to Caa1-PD/LD from B3-PD and its senior unsecured rating to Caa2 from Caa1. The ratings agency views Ensign's cumulative repurchase of $152 million of notes in 2020 for a gain on repurchase of $92 million as a distressed exchange, which Moody's describes as a default. "The downgrade reflects Ensign's worsening liquidity profile during a period of reduced oil and gas drilling activity and an increased risk of loss or further subordination to unsecured debtholders" comments Moody's Analyst Jonathan Reid.

Moreover, Ensign's credit profile is challenged by: 1) a decline in EBITDA driven by reduced capital spending from oil and gas production companies which will lead to an increase in leverage over the next 12-18 months; 2) increased risk to unsecured noteholders due to Ensign's ability to issue up to $125 million debt subordinated to its credit facilities that would further subordinate its unsecured notes and the potential that the company could continue to repurchase unsecured notes at distressed prices; and 3) weak liquidity driven by high revolver utilization and the need to extend its credit facility beyond the current November 2021 maturity date in a depressed industry environment.

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