Toronto, November 22, 2012 -- Moody's Investors Service assigned a Caa1 rating to Paramount Resource Ltd.'s (Paramount) proposed C$250 million senior unsecured notes issue. Paramount's B3 Corporate Family Rating (CFR), B3 Probability of Default Rating (PDR) and existing Caa1 senior unsecured rating were affirmed. The rating outlook was changed to stable from negative. A Speculative Grade Liquidity rating of SGL-3 was assigned.
The proceeds of the notes will be used to fund sizeable negative free cash flow resulting from the company's large capital expenditure program and to repay drawings under its revolving credit facility.
"The affirmation of the B3 Corporate Family Rating and the change in outlook to stable reflects our view that Paramount is progressing towards a larger and more liquids-rich production base," said Terry Marshall, Moody's senior vice president. "Paramount has considerable available liquidity to bridge significant negative free cash flow as it completes the Musreau Deep Cut plant and releases liquids-rich production-behind-pipe in the second half of 2013".
..Issuer: Paramount Resources LTD
....Senior Unsecured Regular Bond/Debenture, Upgraded to LGD4, 68% from LGD5, 73%
..Issuer: Paramount Resources LTD
.... Speculative Grade Liquidity Rating, Assigned SGL-3
....Senior Unsecured Regular Bond/Debenture, Assigned a range of 68 - LGD4 to Caa1
....Senior Unsecured Regular Bond/Debenture, Assigned a range of 68 - LGD4 to Caa1
..Issuer: Paramount Resources LTD
....Outlook, Changed To Stable From Negative
Paramount's B3 CFR is constrained by its significant exposure to natural gas, low leveraged full-cycle ratio, and very weak financial metrics. The rating is supported by substantial alternate liquidity from publicly listed equity investments, the company's willingness and ability to issue equity to support capital investment, significant insider ownership (greater than 50 percent), and liquids-rich production growth potential that will be possible with the completion and start-up of the Musreau Deep-Cut plant in the second half of 2013.
The Caa1 unsecured notes are notched down from the B3 Corporate Family Rating due to the prior-ranking debt in the form of the C$300 million secured borrowing base revolving credit facility, as per Moody's Loss Given Default Methodology.
The SGL-3 Speculative Grade Liquidity rating is based on the assumption that the proposed November 2012 notes issuance closes and reflects adequate liquidity through 2013. Pro forma for the October 2012 equity offering and the November 2012 notes issuance, Paramount will have about C$240 million of cash and C$258 million available, after C$42 million of letters of credit, under its C$300 million senior secured revolving credit facilities. One tranche has commitments of C$225 million and is a borrowing base facility that matures on November 30, 2013 with a one year term out. The other tranche has commitments of C$75 million, matures on November 30, 2013, and is secured by the company's equity investments. We expect that Paramount will generate roughly C$600 million of negative free cash flow through 2013, which will likely be funded with cash on hand and debt. Paramount also has the flexibility to raise funds from asset sales, equity issuances, and/or by selling shares from its equity investments, sources of funds that it has accessed in the past.
The stable outlook reflects Paramount's considerable alternate liquidity, as well as significant production-behind-pipe and midstream assets that will provide cash flow from natural gas liquids production. While a rating upgrade is not likely over the near term, it would be considered if the company can execute its development plan. Specifically, the rating could be upgraded if liquids-rich production appears to be sustainable over 25,000 boe per day, leverage, as measured by E&P debt to production is sustainable below US$30,000 per boe and the LFCR can be maintained over 1x. The rating could be downgraded if Paramount's liquidity is strained with any significant reduction in value in its equity investments or if it fails to advance its development program.
The principal methodology used in rating Paramount Resources was the Global Independent Exploration and Production Industry Methodology published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Paramount Resources Ltd. (Paramount) is a Calgary, Alberta-based natural gas focused exploration and production company with principal properties in Alberta, and average production of about 18,000 boe per day (80% natural gas).
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