Moody's affirms SESI

Moody's Investor's Service said it affirmed with a negative rating outlook SESI, LLC's Ba3 corporate family and probability-of-default rating. The agency also affirmed the B1 rating on the senior unsecured notes guaranteed by Superior Energy Services, Inc., but changed the loss-given-default assessment to LGD4 (60%) from LGD5 (71%).

The rating action follows Superior's announcement that it intends to issue $350 million of unsecured convertible notes due 2026 (not rated by Moody's), with a $50 million greenshoe option. Proceeds from the convertible notes will effectively be used to finance 100% of the cost of Superior's acquisition of Warrior Energy Services Corp, which is expected to close by the end of the year.

The agency said the negative outlook reflects Superior's increasingly aggressive growth strategy and financial policies. Moody's considers the use of convertible debt to finance 100% of the Warrior transaction, as opposed to the previous terms in which 55% of the transaction was to be debt financed, to be financially aggressive. In addition, the Warrior transaction represents the company's second material transaction, following its investment in Coldren Resources, that the company has undertaken in a relatively short amount of time at purchase prices that the agency considers to be high.

Furthermore, the company's pro forma capital structure may be incompatible with the Ba3 corporate family rating in the event of a significant sector slowdown, and the agency said there remains little flexibility in the rating at the current level for a slippage in operating performance, further increases in financial leverage or additional debt-financed acquisitions or share repurchases. The 100% debt financing of the Warrior acquisition is expected to increase Superior's debt-to-EBITDA ratio to 2.1x from 1.2x based on EBITDA for the last 12 months ended Sept. 30.

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