Investing.com -- Moody’s Ratings has affirmed the B3 ratings of Borr Drilling Limited and its wholly-owned subsidiary, Borr IHC Limited, today. In addition, the outlook on both entities has been revised to stable from positive.
The rating action comes as Moody’s anticipates that lower contractual coverage over the next 12 to 18 months may slow Borr’s deleveraging process, resulting in credit metrics that continue to align the company within the B3 rating category.
In 2024, Borr recorded a 31% revenue growth and a decrease in gross leverage (Moody’s-adjusted) to 4.2x from 4.7x in 2023. However, the pace of deleveraging was slower than initially expected due to significant additional debt incurred to finance the acquisition of two newbuild rigs in 2024. Contract suspensions by Saudi Arabian Oil Company (Aramco (TADAWUL:2222), Aa3 Stable) and an oversupply of rigs have negatively impacted Borr’s current utilization levels and future re-contracting prospects.
Issues with receivables collection from Petroleos Mexicanos (PeMex, B3 Negative) last year negatively impacted free cash flow (FCF) generation by $150 million. The company has confirmed that at least 75% of these receivables will be recovered at the start of 2025, indicating it as a timing impact.
The company ended 2024 with a highly negative FCF of $408 million, affected by the receivables collection issues, expenditures on the delivery of two new rigs, and several special periodic surveys.
Moody’s expects trading conditions to remain softened through the first half of 2025, with increased re-contracting risks due to current overcapacity, and uncertainty around the restart of drilling activities in Mexico, after PeMex suspended a number of contracts with Borr in January 2025. However, the slowdown in re-contracting activity is expected to be temporary, with underlying market fundamentals remaining supportive.
Limited visibility into Borr’s 2025 revenues exists, with three out of 24 rigs remaining uncontracted, three rigs receiving temporary suspensions from PeMex, and another three units exhausting their backlog over the course of the year. Contract visibility further declines into 2026, with only 23% of the fleet being contracted at this stage. Moody’s projects EBITDA to remain broadly flat in 2025 and 2026 at around $500 million, assuming the company reaches around 75%-80% contracted coverage. As a result, gross leverage (Moody’s-adjusted) is expected to be around 3.8x. FCF is expected to be around $260 million in 2025, positively impacted by the recovery of the delayed PeMex payments, lower capital investment requirements, and modest shareholder remuneration.
Borr’s rating continues to reflect the company’s relatively large and high-quality fleet of jack-up rigs, its global presence in major hydrocarbon-producing basins, the cyclical nature of offshore drilling activities, a high debt quantum with a demanding amortisation profile, customer concentration on PeMex, and a still limited track record of adhering to stated financial policy commitments.
Borr’s liquidity is considered adequate. The assessment reflects expected retention of cash balances commensurate with the needs of the business, expected sustained positive FCF generation from 2025 onwards, access to a $150 million committed revolving credit facility (RCF), currently undrawn, tight net leverage covenant headroom under the base case, and absence of assets readily available for disposal.
Environmental, social, and governance considerations have a discernible impact on the current rating, which is lower than it would have been if ESG risks did not exist. The negative impact of ESG considerations on Borr’s rating is higher than for an issuer scored CIS-3 and is driven by high environmental, social and governance risks.
Borr’s capital structure includes $1,890 million outstanding senior secured notes, $150 million super senior RCF (respectively, issued and borrowed by Borr IHC Limited) and $250 million of senior unsecured convertible bond due February 2028 (issued by Borr Drilling Limited). The RCF ranks super senior in an enforcement scenario. The senior secured notes are rated in line with CFR at B3 because the instrument represents the majority of the capital structure.
The stable outlook reflects Moody’s expectation that Borr will maintain credit metrics at levels commensurate with the current rating guidance by successfully re-contracting its rigs, generating sufficient free cash flow to satisfy debt servicing requirements, and managing its balance sheet conservatively by prioritising debt reduction over shareholder remuneration.
Borr’s ratings could be upgraded due to material reduction in gross debt, sustained high fleet utilisation, growing revenue backlog and visibility in an improving industry environment, Moody’s-Adjusted Debt / EBITDA sustainedly below 3.5x, longer track record of adhering to the stated financial policy, and achievement and maintenance of a strong liquidity position. Conversely, Borr’s ratings could be downgraded following difficulty in re-contracting rigs or new contracts are signed at significantly lower day-rates, sustained negative free cash flow generation, Moody’s-Adjusted Debt / EBITDA sustainedly above 4.5x, interest coverage falling below 1.5x, or weakening liquidity.
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