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Investing.com -- On Monday, Fitch Ratings upgraded the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of MODEC, Inc. and its subsidiary MODEC Finance B.V. to ’BBB’ from ’BBB-’. The senior unsecured notes of MODEC Finance B.V. also received an upgrade to ’BBB’ from ’BBB-’. The Rating Outlook for the IDRs remains Stable.
MODEC’s upgrade was influenced by its enhanced financial profile, growth in EBITDA, negative net debt, and substantial financial flexibility. The company has consistently renewed its backlog with high credit quality partners, thereby reducing its exposure to Brazil. MODEC’s cash flow profile, supported by USD denominated charter contracts with an average lifespan of 12.6 years, is predictable.
The Stable Outlook is based on Fitch’s expectation that MODEC’s leverage will remain at or below 2.0x over the rating horizon. The company’s CFO significantly covers capex needs without the need for additional debt, ensuring a positive Free Cash Flow (FCF) profile.
Fitch projects that MODEC’s EBITDA will reach nearly USD400 million in fiscal 2025, a 20% increase from fiscal 2024. This projection is based on the steady progress in the construction pipeline and large-scale projects like the floating, production, storage and offloading (FPSO) Uaru (ExxonMobil (NYSE:XOM)) and Raia (Equinor). Fitch anticipates that these projects will enhance profitability in the upcoming years.
MODEC’s ratings reflect its strong business position in the global ultra-deep water FPSO system market. This position is supported by a solid Engineering, Procurement, Construction, and Installation (EPCI) track record, a diversified asset base, robust operational uptime, and a resilient backlog renewal. The company has a charter backlog of USD9.6 billion with an average remaining contract life of 12.6 years.
The ultra-deepwater FPSO market, where depths exceed 2,000 meters, is dominated by MODEC and one other company. MODEC primarily targets the deepwater and ultra-deepwater oil and gas reserves market, which offers lower breakeven costs compared to onshore exploration. Currently, more than 40% of MODEC’s awarded contracts are tied to ultra-deepwater projects.
MODEC’s ratings are unaffected by Brazil’s country ceiling. This is due to the EBITDA from its EPCI business covering interest expenses and the company holding significant cash abroad relative to its overall debt. Counterparty risk is mitigated by partial guarantees from field consortium partners under charter payment obligations.
MODEC, Inc. and MODEC Finance B.V. have high legal, medium operational, and low strategic incentives, resulting in an equalization of the ratings. MODEC, Inc., as the parent company, is the sole guarantor of MODEC Finance B.V.’s debt, which consists of issuances or senior unsecured notes.
Fitch’s assumptions include EPCI and O&M revenue dictated by three assets under construction at the start of 2025, and three or more from 2025 onward. It also assumes an average annual capex of USD20 million over the next four years and dividends in line with the growth of net earnings over the forecast period.
Factors that could lead to a negative rating action or downgrade include a failure to maintain hard-currency debt service coverage greater than 1.5x, higher concentration of cash flow from non-investment grade off-takers and/or sovereigns, leverage measured as total debt/EBITDA after associates greater than 2.5x on a sustained basis, and a substantial backlog reduction. A material increase in EBITDA scale coupled with higher cash flow contribution diversification from higher-rated countries could lead to a positive rating action or upgrade.
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