Rating Action: Moody's upgrades BEP Ulterra's term loan to B2Global Credit Research - 01 Sep 2022New York, September 01, 2022 -- Moody's Investors Service, (Moody's) upgraded BEP Ulterra Holdings, Inc.'s (Ulterra) corporate family rating (CFR) to B2 from B3, probability of default rating to B2-PD from B3-PD, and senior secured term loan rating to B2 from B3. The rating outlook remains stable."The upgrade reflects an accelerated pace of recovery in 2022 and Moody's expectation that Ulterra will deliver strong earnings, lower leverage and strong free cash flow, with positive momentum going into 2023", said Elena Nadtotchi, Senior Vice President at Moody's.Upgrades:..Issuer: BEP Ulterra Holdings, Inc..... Corporate Family Rating, Upgraded to B2 from B3.... Probability of Default Rating, Upgraded to B2-PD from B3-PD.... Senior Secured Bank Credit Facility, Upgraded to B2 (LGD4) from B3 (LGD4)Outlook Actions:..Issuer: BEP Ulterra Holdings, Inc.....Outlook, Remains StableRATINGS RATIONALEUlterra's B2 CFR benefits from improving conditions in the oilfield service industry and is gaining market share in all of its key geographical markets. Ulterra is also able to raise prices that broadly compensate for rising labor costs and should see some improvement in the gross margins. As demand for Ulterra's products continues to improve, Moody's expects the company to deliver strong growth in revenue and EBITDA, and generate strong free cash flow. Moody's expects Ulterra's leverage to decline, with Debt/EBITDA falling below 2.5x in 2022, compared to 6.1x in 2021, and for EBITDA/interest to continue to strengthen as well.Ulterra's CFR is constrained by the company's single product line focus and small scale, as measured by assets, revenue and EBITDA, despite its strong market position in its core niche market segment of Polycrystalline Diamond Compact (PDC) drill-bits. Ulterra's cash flows are cyclical and highly correlated to the volatility of upstream drilling.Moody's expects Ulterra to maintain adequate liquidity, supported by its cash balance of $27 million at the end of Q2 2022 and strong free cash flow generation, as well as full availability under its $50 million super priority revolving credit facility, maturing in November 2023. The revolving credit facility has a number of financial covenants, including maintaining a maximum net super priority debt/EBITDA ratio of 1.0x at all times and a springing net total debt/EBITDA covenant of 4.5x tested when utilization exceeds 60%. Ulterra should remain well in compliance with its covenants through 2023. While Moody's expects Ulterra to not use its revolver in 2022 and 2023, it is working to extend the maturity of its facility in the ordinary course of business. The senior secured term loan maturing in 2025 has a first-lien pledge of all the assets of the issuer and guarantors, including the operating subsidiaries, and is rated B2 (at the level of the CFR). The $50 million super priority revolving credit facility is paid on a first out basis in the event of default. The term loan is rated the same as the CFR because of the small size of the revolver compared to the size of the term loan. The term loan facility and the revolving credit facility have liens on the assets of the company and its downstream guarantors and the subsidiaries.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn upgrade of the B2 ratings may be achieved if Ulterra maintains conservative financial metrics and good liquidity, generates consistent positive free cash flow, reduces cash flow volatility, and there is a broadly supportive trend in drilling activity. Ratings could be downgraded if Ulterra's liquidity position weakens or if its leverage, measured by debt/EBITDA, rises above 4.5x.Ulterra Holdings, Inc. is a manufacturer of Polycrystalline Diamond Compact (PDC) drill bits and stick-slip reduction tools headquartered in Fort Worth, Texas. Ulterra is owned by the private equity firms Blackstone Group and American Securities.The principal methodology used in these ratings was Oilfield Services published in August 2021 and available at https://ratings.moodys.com/api/rmc-documents/74277. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. 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Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Elena Nadtotchi Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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