Moody's drops Varel to Caa2

Moody's Investors Service said it downgraded Varel Funding Corp.'s corporate family and probability-of-default ratings to Caa2 from B3, the senior secured bank debt rating to B3 (LGD3, 31%) from B1 (LGD3, 32%) and changed the outlook to negative from stable.

The downgrade reflects continued drilling and oilfield service sector weakness, the sharp decline in Varel's cash flows and ongoing uncertainty about the company's ability to comply with its leverage covenants over the next year, according to the agency.

Ratings are restrained by Varel's risk exposure to a single product line, the sales of which are cyclical, its small scale and market share relative to peers, and high leverage, the agency said.

The company's adjusted debt-to-EBITDA ratio was 5.2x as of April 30.

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