Wednesday June 14, 5:45 pm Eastern Time
S&P raises CHC Helicopter corp credit rating
(UPDATE: Press release provided by Standard & Poor's)
NEW YORK, June 14 - Standard & Poor's today assigned its single-'B' rating to CHC Helicopter Corp.'s euro (Eur) 125 million senior subordinated notes due 2007.
Standard & Poor's also raised its corporate credit rating on CHC to double-'B'-minus from single-'B'-plus.
The outlook is stable.
The notes are rated two notches lower than the corporate credit rating, reflecting their subordination to the senior secured debt. The note proceeds will be used primarily to refinance part of CHC's current bank facility. The current bank facility was arranged as part of CHC's C$542 million acquisition of Helicopter Services Group ASA in 1999.
The ratings are based on CHC's position as one of two global heavy helicopter operators in the oil services industry, its relations and contracts with major oil companies, and its efficient operations and fleet management. The ratings are tempered by the company's high debt load and its relatively high level of fixed-lease obligations.
CHC is the largest helicopter service company in the world, and the largest commercial operator of heavy airframes (20 or more passengers). Consolidated with Helicopter Services Group, the company has a worldwide fleet of 320 aircraft, of which about 60% by value are classified as heavy (as of Jan. 31, 2000).
Almost two-thirds of CHC's revenues currently come from the oil and gas industry, with a particular concentration in the U.K. and Norwegian sectors of the North Sea. The company has bases on six continents and serves most of the international offshore activity areas with the exception of the Gulf of Mexico. In the oil and gas sectors in which CHC operates, helicopters are typically chartered on longer-term contracts.
Although the nature of these contracts provides more stability than spot contracts, they remain susceptible to usage volume (and thus to the cyclicality of exploration and production activities) and are competitively bid. The consolidation in the helicopter services industry--the industry is now oligopolistic in all major markets--may help stabilise the pricing and the customer relationships in the oil and gas segment. Almost 70% of CHC's helicopter revenues in the next year will come from longer-term contracts.
Helicopter service companies are more stable than other service providers in the oil industry, because helicopters operate throughout the exploration and production cycle, have demand outside the oil industry, and can be moved to other markets and regions.
In addition, CHC derives almost 80% of its oil and gas revenues from flights to production platforms, a more stable sector than exploration rigs. Nonetheless, cyclicality does affect helicopter demand, and surplus capacity can drive down rates while a drop in utilization rates can affect profitability.
Standard & Poor's expects the North Sea sectors will increase exploration and production drilling (as capital spending increases in the region) and maintain current production levels in the next few years.
Longer term, this mature region has to develop its deep sea and gas reserves (and markets), and likely address its high tax structure, to maintain current production volumes. Cost initiatives in the U.K. sector already have reduced exploration and production operating costs to more competitive levels, resulting in a significant decline in industry flight hours.
CHC's operating margins in the North Sea and international markets have been notably better than its main competitor and were well managed through the industry trough in 1999, the industry cost initiatives, and the switching of some major contracts.
By eliminating corporate and U.K sector overhead at Helicopter Services Group, as well as other more moderate cost synergies, CHC is expected to improve the operating margins of the consolidated company to the high-teen area in fiscal 2001.
Positive operating results are offset by the company's high fixed obligations, and the financial profile is currently weak for the rating category.
Although the company has been actively selling off noncore divisions and paying down debt, the lease-adjusted debt level (capitalizing the company's lease payments) is currently more than 1.0 times (x) revenues. For fiscal 2001 the company's total lease-adjusted debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) will likely be about 4.5x. EBITDA interest coverage for fiscal 2001 is expected to be above 2.2x.
Capital spending requirements are very modest--given a static fleet count--as all maintenance is expensed. Accordingly, the company is expected to be cash flow positive after capital spending through the next few years.
OUTLOOK: STABLE
Standard & Poor's expects the company to reduce its leverage to maintain the rating. This will most likely occur through debt reduction, either by application of internally generated cash or from asset sales. The industry environment is moderately positive through the next few years, and the company is also expected to maintain or improve its current operating performance, Standard & Poor's said.