Transocean Inc. (NYSE:RIG) shares are up over four percent in today's trading as the stock continues its run despite a credit downgrade from Fitch. The stock is up recently on an announcement of its inclusion in the S&P 500, which will force many mutual funds to begin acquiring the shares during their next rebalance. It also marks the company as an industry giant.

So, is this downgrade worth worrying about? Well, Fitch downgraded the company's debt to BBB-, two notches above "junk" status, because of Transocean's intent to devote free cash flow during the next two years towards debt repayment. Luckily, the company has a very strong backlog and recently increased the diversification of its fleet, meaning that this may not be such a bad idea. In the end, the company will probably not have a problem with cash.

However, the company did establish a 364-day $15 billion bridge loan to fund its cash dividend to shareholders (as a result of the SantaFe merger), which will be reduced through a combination of debt and equity. This is what has caused some concern by the credit agency and several institutional investors because it means the company will be leveraging itself substantially in order to unlock value in its future cash flows in today's dollars.

In the end, Transocean is banking on the fact that it is underleveraged given its future cash prospects. This may be true, but we now know how quickly markets can turn when excess leverage is used. It was probably prudent for Fitch to cut ratings, but it doesn't mean their is a problem quite yet. Combined, these factors make RIG a stock worth watching!

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