FMC Technologies, Inc. -- Moody's downgrades TechnipFMC to Baa3; on review for downgrade
Rating Action: Moody's downgrades TechnipFMC to Baa3; on review for downgrade
Global Credit Research - 07 Jan 2021
New York, January 07, 2021 -- Moody's Investors Service (Moody's) downgraded TechnipFMC plc's (TechnipFMC) ratings, including its issuer rating to Baa3 from Baa2 and the rating on the EUR 450 million unsecured convertible bonds due 2021 as well as $500 million senior unsecured notes due 2022 to Baa3 from Baa2. Moody's also downgraded FMC Technologies, Inc.'s (FMC Technologies) commercial paper rating to P-3 from P-2. TechnipFMC's and FMC Technologies' ratings were placed on review for downgrade.
These actions follow TechnipFMC's announcement that it is working towards spin-off of its Technip Energies segment into a standalone public company (SpinCo)[1].
"The spin-off of Technip Energies should result in a smaller, less diversified, and more levered company constituting the remaining businesses," said Amol Joshi, Moody's Vice President and Senior Credit Officer.
Downgrades:
..Issuer: FMC Technologies, Inc.
....Commercial Paper, Downgraded to P-3 from P-2; Placed Under Review for further Downgrade
..Issuer: TechnipFMC plc
.... Issuer Rating, Downgraded to Baa3 from Baa2; Placed Under Review for further Downgrade
....Senior Unsecured Notes, Downgraded to Baa3 from Baa2; Placed Under Review for further Downgrade
Outlook Actions: ..Issuer: TechnipFMC plc
....Outlook, Changed To Rating Under Review From Negative
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
TechnipFMC's downgrade reflects the company's weak leverage metrics and lack of visibility regarding sufficient leverage improvement at a time of low oil prices and weak business conditions, especially for the company's subsea business. The Technip Energies spin-off will also diminish the remaining company's (RemainCo) profile, reducing its scale and business diversification.
The Technip Energies segment generated roughly half of TechnipFMC's revenues in the first nine months of 2020. While revenue and earnings can be lumpy in the Technip Energies segment because of its project based work, this segment requires very little capital (consumed about 5% of TechnipFMC's total capital spending in 2019) and generally receives significant advance payments and progress payments from customers that leads to large cash balances. Moody's estimates that RemainCo will be left with significantly less assets, as well as a smaller revenue backlog since the Technip Energies segment had around 60% of total revenue backlog as of September 30, 2020.
The separation, however, will create two distinct and highly specialized businesses with strong market positions. Each entity will be able to focus on its core competencies with dedicated personnel and resources that should facilitate more efficient capital allocation, potentially higher profitability and greater operational flexibility over the long-term.
The review for downgrade will focus on RemainCo's ability to meaningfully improve its credit profile, utilize cash to reduce debt, address its upcoming maturities, with a continuing focus on further debt reduction as well as its ability to generate positive free cash flow in a stressed oil price environment. The extent to which the spin-off further weakens TechnipFMC's credit quality will depend on the resultant financial leverage at RemainCo, the allocation of specific assets and liabilities including cash, and the company's future financial policy, governance structure and strategy following the separation.
While RemainCo is expected to improve its gross debt to EBITDA (including Moody's adjustments) over time, should the separation transaction close on the conditions and structure we currently expect, and our forward view of its business and financial risk remains unchanged from today, the company's issuer-level ratings could be further downgraded by up to one notch from Baa3. RemainCo's other ratings could also be further downgraded depending on the new debt structure. Although unlikely, if the separation transaction does not close, TechnipFMC's ratings should remain at Baa3. There is also inherent uncertainty and execution risk involved in a transaction of this size and complexity with global operations.
TechnipFMC's Baa3 issuer rating reflects the company's geographic and business diversification, leading market position in the subsea segment and a track record of relatively conservative financial policies. TechnipFMC, primarily through its Technip Energies segment, is also one of the leading providers of engineering and construction services for the energy industry. Project backlog provides revenue visibility and is supported by TechnipFMC's strong competitive position and its integrated project execution capabilities. The company can engage with customers earlier in the development process with integrated front end engineering design (FEED) studies, and to more cost effectively and efficiently execute projects, likely improving overall project economics by reducing costs for customers through standardization and technological innovation, especially deepwater. However, the company has significant exposure to weak offshore drilling and development activities through its subsea business, that will continue to pose downside risks to credit metrics. While TechnipFMC's cash balance should provide some flexibility, the company has multiple debt tranches and faces near term debt maturities, including its EUR 450 million January 2021 debt maturity.
The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062654. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
TechnipFMC manufactures, markets, and services equipment used in the production of oil and natural gas, and provides project management, engineering and construction services for the energy industry across three segments: Subsea, Technip Energies, and Surface Technologies. FMC Technologies, Inc. and Technip SA merged in January 2017 to form TechnipFMC plc and the combined company is headquartered in London, United Kingdom.
REGULATORY DISCLOSURES
For 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. 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 www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
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 www.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 www.moodys.com.
REFERENCES/CITATIONS
[1] Company Press Release; 07-Jan-2021
Please see www.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 ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Amol Joshi, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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