OREANDA-NEWS. Fitch Ratings has downgraded UK-based energy group Afren plc's Long-term Issuer Default Rating (IDR) to 'D' (Default) from 'RD' (Restricted Default), following management's announcement that it has taken steps to put Afren Plc into administration. The company's senior secured rating has been affirmed at 'C', and the Recovery Rating (RR) revised to 'RR5' from 'RR6'.

The rating actions follow Afren's announcement on 31 July that its discussions with creditors aimed at recapitalising the company have failed and the board has decided to take steps to put the company into administration. According to Afren, the appointment of administrators has been made with the consent of the company's secured creditors who see this as an important step in preserving value in Afren's subsidiaries. No other entity in the group is going through insolvency proceedings at present.

KEY RATING DRIVERS
'RR5' Recoveries
We have affirmed Afren's senior secured rating and secured 2016, 2019 and 2020 bonds at 'C'. The RR was revised to 'RR5' from 'RR6' reflecting 'below average' (rather than 'poor') recovery prospects. Our updated recovery analysis shows a 21% recovery rate for senior secured creditors, assuming the going concern enterprise value of around USD950m.

Lower Production, Higher Leverage
Afren's credit metrics have significantly weakened since the beginning of 2014, reflecting lower output in 2014 and 1Q15 compared with 2013 and lower oil prices. Its funds from operations (FFO) adjusted gross leverage was 2.7x at end-2014 (2.2x at end-2013), and we believe it will exceed 5x in 2015, assuming average net production of 20mbpd and Brent price of USD55/bbl.

Reserve Revision Adds to Pressure
In January 2015 Afren announced it has revised down gross 2P reserves at the Barda Rash field in the Kurdistan region of Iraq by 190 million barrels of oil equivalent. The movement in reserves and resources is due to the 2014 reprocessing of 3D seismic shot in 2012 and processed in 2013, as well as results from the company's drilling campaign. Although we have not factored in the potential production in Kurdistan in our forecasts, this change removed a potential source of flexibility for the company or recovery for creditors.

Concentrated Production
Afren's production remained highly concentrated. In 1Q15, Ebok accounted for 75% of Afren's total production, and it had no oil output outside Nigeria. This concentration exposes Afren to elevated operational, regulatory and tax risks.

Tax Holiday Expires 2016
Oil companies are generally heavily taxed in Nigeria. They pay substantial royalties and are subject to the petroleum profit tax (PPT), which normally varies from 50% to 85% of pre-tax profits. Afren's Ebok field is exempt from paying PPT until May 2016, which has significantly benefited Afren's cash flows. Unless the company's tax status is re-negotiated we expect that Afren's cash tax payments will materially increase in 2017.

RATING SENSITIVITIES
Fitch may re-rate Afren should the administration does not result in Afren's liquidation and Fitch has sufficient information to do so. Otherwise Fitch will consider withdrawing the ratings.

KEY ASSUMPTIONS
- Oil price: USD55/bbl in 2015, USD65 in 2016, USD75 in 2017 and USD80 thereafter
- Net oil production to average 20mbpd in 2015
- No dividend payments

LIQUIDITY AND DEBT STRUCTURE
Fitch does not have sufficient information to access Afren's liquidity position. According to the company, the lack of liquidity and a failure of restructuring negations with creditors have resulted in the decision to file for bankruptcy, we therefore assume Afren's liquidity is extremely weak.