Moody's assigns (P)Caa2 to DNO notes

Moody's Investors Service assigned a provisional Caa2 rating to the proposed $175 million of senior notes of DNO ASA, the Norwegian upstream oil company. The outlook is stable.

Moody's said that the Caa1 senior implied rating assigned to DNO reflects the very modest scale of the company's existing proved reserves (particularly its proved developed reserves) and low production level, the small number of fields in operation and the risks associated with operating mature offshore fields (including declining production and high costs), as well as DNO's track record of rapid, acquisitive growth.

The rating also takes into account the company's vulnerability to low oil prices and one-off negative events, its exposure to field development risks, dependence on other parties to proceed with developments, and competition from financially stronger oil companies.

At the same time, however, Moody's acknowledged DNO's recent success in increasing its production and reserve base and its substantial organic growth potential. Also taken into consideration are DNO's demonstrated ability to improve efficiency through cost-cutting and incremental production, its improving country risk mix, and limited abandonment liabilities.

The (P)Caa2 rating on the proposed notes reflects their actual and potential subordination to other legally and structurally more senior debt, Moody's said.

Much of the proceeds of the proposed bond issue will be devoted to financing developments, as well as repaying the company's secured revolver and providing it with some flexibility to undertake further external growth.

The amount of total debt that DNO may bear going forward is being restricted within the covenants of the proposed bond to $3 per barrel of proved reserves (plus a general $10 million carve-out). The bonds will, however, be potentially subordinated to a limited amount of secured debt, namely the greater of $25 million or $1 per proved developed reserves (currently 21.6 million boe).

The relatively tight constraints have resulted in Moody's notching the notes down just a single notch to (P)Caa2 to reflect anticipated future subordination levels.

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