OREANDA-NEWS. S&P Global Ratings today raised its corporate credit rating on Oklahoma City-based Seventy Seven Energy Inc. (SSE) to 'CCC+' from 'D'. The outlook is developing.

At the same time, we raised the issue-level rating on the company's reinstated $500 million secured term loan due 2020 to 'B-' from 'D'. The recovery rating on this debt is '2', indicating our expectation of substantial (70% to 90%, higher end of the range) recovery to creditors in the event of a payment default. We are also withdrawing the 'D' ratings on the company's senior unsecured notes and structurally subordinated notes, which have been converted to new common equity through the company's restructuring.

"The upgrade reflects SSE's new capital structure post reorganization," said S&P Global Ratings credit analyst Kevin Kwok. "The reorganization converted approximately $1.1 billion of senior unsecured debt and structurally subordinated debt to equity," he added.

S&P Global Ratings views SSE's business risk as vulnerable. We continue to assess SSE's financial risk profile as highly leveraged, reflecting funds from operations (FFO) to debt of less than 5% this year, although credit metrics have improved as a result of the $1.1 billion reduction in debt. We view SSE's liquidity as adequate.

The outlook is developing, reflecting the possibility that we could lower the rating if liquidity deteriorated, which could occur if the company loses its primary customer and does not secure additional contracts, or raise the rating if the company is able to increase customer diversification and equipment utilization, which would most likely occur in conjunction with an industry recovery.

We could downgrade the company if liquidity deteriorated, which would most likely occur if Chesapeake terminates contracts before 2018, demand for oilfield services does not recover in 2017, or SSE was not able to increase customer diversification.

We could upgrade the company if we expected FFO to debt to improve to at least 12% for a sustained period, which would most likely occur if demand for oilfield services rebounds next year. We expect Chesapeake to honor its contracts with SSE through 2018.