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    Moody's downgrades Harvey Gulf

    Company News // March 6, 2017

    Moody's Investors Service (Moody's) has downgraded Harvey Gulf International Marine Corp's Corporate Family Rating (CFR) to Caa3 from Caa2, Probability of Default Rating (PDR) to Ca-PD from Caa3-PD, and senior secured term and revolving credit facility rating to Caa3 from Caa2. The outlook remains negative.

    "Harvey Gulf's downgrade to Caa3 reflects its escalating financial leverage and weak liquidity," said Moody's. "Although Harvey Gulf is relatively better positioned in its peer group with a moderate portion of its utilization coming from firm contracts through 2017 and beyond, its debt to EBITDA ratio by year-end 2017 will be nearly 10x (per Moody's calculations) and worsen through 2018.

    "Given the anemic offshore activity and oversupply of the OSVs, Harvey Gulf's current utilization and day rates for the non-contracted vessels operating in the spot market are not expected to improve through 2017.

    "Harvey Gulf is expected to have generated approximately US$160 million of EBITDA in 2016, but Moody's outlook for Harvey Gulf's 2017 EBITDA will result in heightened liquidity stress, with increased risk of breaching minimum adjusted EBITDA covenant towards the end of 2017.

    "The company's ability to access the revolver will be severely constrained due to the risk of covenant breach and the likelihood of balance sheet restructuring is high. Harvey Gulf's ratings are also affected by its concentration in the Gulf of Mexico.

    "Harvey Gulf could also execute open market debt purchases at steep discount to the par value, resulting in a distressed exchange (an event of default per Moody's definition of default)," said Moody's.

    Harvey Gulf's term loan A, term loan B, and revolving credit facility are all rated Caa3. The credit facilities benefit from a first lien on substantially all of the company's assets and comprise the vast majority of the debt in the company's capital structure, and are thus rated in line with the company's CFR. A higher than normal family recovery rate of 65 per cent has been utilized to recognize the single class of debt in the company's capital structure and an appraised value for the mortgaged vessels that exceeds the total amount of debt.

    Harvey Gulf has weak liquidity through 2017. Moody's projects a cash need of approximately US$35 million above the company's operating cash flow through 2017, in order to service the debt and fund capital expenditure commitments related to its newbuild programme.

    A portion of this cash need would have to be funded through draws on the revolver. The senior secured credit facility requires Harvey Gulf to comply with four covenants - a minimum fixed charge coverage ratio of 1.10x, a minimum asset coverage ratio of 1.15x through 09/30/2017 and 1.20x thereafter, a total leverage ratio which is suspended through 12/31/2017 and 6.0x thereafter, and a minimum adjusted EBITDA covenant requiring Harvey Gulf to generate a minimum adjusted last 12 months EBITDA of US$123 million at the end of first quarter 2017, growing incrementally to last twelve months EBITDA of US$132 million by the end of 2017.

    Moody's projects that Harvey Gulf will breach the minimum EBITDA covenant by the end of 2017 thereby restricting the company's access to revolver.

    Additionally, Harvey Gulf is unlikely to be in compliance with its leverage ratio covenant of 6.0x in 2018. Secondary sources of liquidity are limited as all of the company's assets are pledged to the lenders and any asset sale would likely be required to reduce debt.

    The negative outlook reflects the liquidity stress and the potential breach in the minimum required EBITDA covenant in late 2017.

    Moody's said a downgrade could occur if the company does not maintain compliance with the loan documents or performs balance sheet restructuring.

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