Fitch Drops Seven Energy to ‘RD’

By Modupe Gbadeyanka

The Long-Term Issuer Default Rating of Nigeria-based Seven Energy International Limited has been downgraded to ‘RD’ from ‘C’ by Fitch Ratings.

This followed Seven Energy’s announcement that the 30-day grace period has expired for the cash interest payment the firm missed on its $300 million secured notes and $100 million notes due 2021.

It was gathered that the company could not meet the conditions for the interest capitalisation.

The expiration of the grace period was an event of default under the notes’ terms.

However, Seven Energy is holding talks with its creditors to agree a standstill on its debt service obligations.

The company is also discussing a comprehensive financial restructuring with its existing and potential lenders and investors.

According to Fitch, it simultaneously affirmed the wholly owned subsidiary Seven Energy Finance Limited’s $300 million 10.25 percent senior secured notes due 2021 at ‘C’ with an ‘RR6’ Recovery Rating.

All Seven Energy’s oil liftings from oil mining licences (OMLs) 4, 38 and 41 under the strategic alliance agreement (SAA) with the state-owned Nigerian Petroleum Development Company Limited (NPDC) have stopped since February 2016, as the Forcados oil pipeline and terminal remain shut due to the threat of militant attacks.

Earlier in 2017, Seven Energy announced that NPDC intends to terminate the SAA unless the company meets outstanding cash calls. Seven Energy has taken steps to preserve its contractual rights under the SAA, but there is a risk that this once key cash-generating asset will remain largely unavailable.

Near-term cash flows from the company’s gas business remain weak as sale volumes are volatile and the company’s major gas off-takers, Nigerian state-owned power stations, delay payments for consumed gas.

In April 2017, Seven Energy reported delays in finalisation and effectiveness of the World Bank partial risk guarantee (PRG), which is meant to compensate Seven Energy for up to $112 million of gas supply invoices to Calabar power station, its principal gas off-taker.

The company currently expects the PRG to be finalised soon, after approval from the Nigerian authorities is obtained and the PRG could be called 90 days after its finalisation. Finalisation of the PRG would be positive, but we do not expect it to materially improve the overall payment discipline for Seven Energy’s gas business.

Longer term, the natural gas business in Nigeria’s southeast is an important growth driver for Seven Energy, which is on track to ramp up gas sales to over 150 million cubic feet per day.

Following the completion of the power grid, local power stations including Calabar can now run at full capacity. On the other hand, power stations continue suffering from stretched liquidity and poor receivables collection, and are delaying their payments to the company.

Seven Energy’s midstream gas infrastructure assets are fully ring-fenced and serve as security for the company’s $385 million Accugas loan.

There is a risk that the Accugas lenders may decide to enforce the security on the gas assets, stripping the company of its presently main cash-generating asset and effectively forcing it into liquidation.

Seven Energy’s natural gas revenues are US-dollar pegged but are received in Naira. Nigerian companies, including Seven Energy, are facing difficulties exchanging Naira into US Dollars, which the company needs to service its US-dollar debt, at the official exchange rate.

To alleviate the problem, the company is currently negotiating with lenders to convert the Accugas facility into naira and extend its maturity. The naira convertibility issue negatively affects the company’s liquidity as long as Forcados remains shut, as the company receives little US dollar revenue from its other operations.