Diamond Offshore 4 7/8% of 2043

[thepupil]

Just starting DD, feel free to opine

 

Price: 60 / 62

Yield: 8.57% YTM, 7.99% CY, Treasuries + 565bps

Issuance Spread: t+120

Duration: 11.5

Rating: Baa2 / BBB+

 

Not liquid

 

Capital Structure

 

$493MM commercial paper

$1,500MM Revolver, fully undrawn

$2000MM Senior Unsecured Bonds

  $500MM 5 7/8% of '19      ($101)

  $250MM 3.45% of '23        ($82)

  $500MM 5.7% of '39          ($71)

  $500MM 4 7/8% of '43  ($61)

 

$2,493MM of total debt

$2,603MM of Market Cap

 

$5,000MM EV

 

Assets:

$840MM of current assets, mostly receivables (Note: 16% of which is Petrobras)

$6,800MM of offshore drilling rigs

 

Current Assets=Current liabilities, With the assumption that the receivables are adequately reserved against (maybe they aren't), you basically have $2B of long term debt here and the possibility of $1.5B of the revolver getting in front of you.

 

Collateralizing you is a bunch of crappy old rigs for which DO is famous, as well as some brand spanking new drillships and stuff. It's not all super old, they've spent like $6B+ in the past 4 or 5 years, but my rudimentary understanding is the company owns one of the worst fleets in the industry. They have $5B+ of backlog, but who knows what that means.

 

Loews owns 53% of the equity, worth $1.3B at current market, so they have something at stake here.

 

My initial thoughts on these is that at $61 / $100, you are creating the rigs at an undemanding valuation and that the overcapitalized sponsor (L w/ $3B+ of net cash) who is below you in the cap structure provides a little bit of extra protection. I'm not quite sure if the L parental support is enough to get me interested though. And I probably wouldn't lend to the company at 8-9% without the L backing, so I'm hesitant to hang my hat on that.

 

If I can get comfortable w/ the downside, I'll buy them, making 8% cash carry and 11% for every 100 bps of spread tightening when (if ever) energy improves is not a terrible return. Still not there though.

 

On my watchlist, would appreciate anyone telling me why I'm an idiot for considering them.

 

 

 

 

[benhacker]

I saw the price on the headline of your note, and I basically thought everything you thought in your note...

 

Seems decent, but not sure I would step into this at these prices... wouldn't be a bad bet though for sure.

[Jurgis]

OT?

 

ATWOOD OCEANICS INC NOTE CALL MAKE WHOLE 6.50000% 02/01/2020, B1/BB, 26% YTM. Too distressed for you? Atwood had a pretty good fleet but I think they levered on top of the cycle. Still their fleet should be (much?) better than DO. I have to relook at these, since I only glanced through some time ago.

[petec]

I haven't looked at this at all but do you expect free cash flow in the next few years?  As in, can they pay debt down?

[Jurgis]

ATW: This probably reflects current situation: http://marketrealist.com/2015/12/atwood-postpones-delivery-drillship-weighs-heavy-stock/

( see part 2 / part 3 about backlog and debt/etc. if they don't open automatically ).

 

In short: 2017-2018 are not contracted. If they are not contracted, ATW will face significant issues coming into debt repayment.

 

OTOH, are you sure that DO is in better situation? Looking at balance sheets, I don't see why DO is higher rated and yields so much less. Is that because of possible L backstop?

 

Edit: I guess one argument for DO is that they might be able to repay 19's and 23's and then they don't have maturity until '39.