-- The EUR152.9 million senior notes issued by South Africa-based recycler The New Reclamation Group Pty Ltd. (Reclam) are now less than eight months from their maturity date of Feb. 1, 2013. -- We have limited visibility on the company's plans to refinance the notes or on its ability to execute any refinancing plan. -- We are therefore lowering to 'CCC-' from 'CCC+' our long-term corporate credit and senior debt ratings on Reclam. -- The negative outlook reflects our view of a possible default by Feb. 1, 2013, if Reclam fails to refinance the senior notes. Rating Action On June 29, 2012, Standard Poor's Ratings Services lowered to 'CCC-' from 'CCC+' its long-term corporate credit and senior debt ratings on South Africa-based recycler New Reclamation Group Pty Ltd. (Reclam). At the same time, we removed the ratings from CreditWatch, where we placed them with negative implications on March 20, 2012. The outlook is negative. Rationale The downgrade reflects our view of the risk over Reclam's ability to refinance its EUR153 million (South African rand 1.6 billion) senior notes by Feb. 1, 2013. A failure to refinance the notes would lead to default. Currently, Reclam does not have sufficient liquidity sources to repay the notes. Furthermore, at this stage, we have limited visibility on the company's plans to refinance the notes, its ability to execute any refinance plan, and notably the ability of its parent (Reclamation Holdings (Pty) Ltd.; not rated) to support such refinancing. In our view, the refinancing risk is heightened by the notes' exposure to foreign exchange fluctuations and by Reclam's high leverage, which is itself exacerbated by ongoing weak results from the scrap recycling operations. We also understand that the company's bank support is limited. As of March 31, 2012, Reclam's consolidated Standard Poor's-adjusted debt was ZAR2.1 billion, comprising the ZAR1.6 billion senior notes and ZAR0.2 billion of working capital finance debt. Of this total, ZAR1.8 billion is due in February 2013. As the senior secured notes are unhedged, the total outstanding amount can change materially because the functional currency is rand, while the company issued in euros. This could add another layer of debt and increase the risk of default. As of March 31, 2012, Reclam had ZAR280 million on the balance sheet. Under our base-case credit scenario, we assume that Reclam's scrap recycling activities will generate free operating cash flow of ZAR80 million in the 12 months to March 31, 2013, assuming funds from operations of about ZAR180 million and capital expenditure (capex) of ZAR80 million in the same period. We therefore assess liquidity as "weak," with a deficit of ZAR1.4 billion. We believe that Reclam could seek liquidity from several sources to meet the aforementioned funding gap. That said, the short period before the notes' maturity and our limited visibility on the company's plans means that we view the situation as highly volatile. In our opinion, the possible sources of liquidity include, among others: -- Further dividends from the diamond mining segment. -- New loans from South African banks against the recycling business. -- Shareholder support. We consider that Reclam's parent has a significant interest in the diamond business. For example, the parent provided a shareholder loan of ZAR313 million in the third quarter of 2010, and it has a high level of involvement in the diamond operations. Another incentive for the parent to support Reclam is the possibility that it would lose its stake in the diamond business if Reclam defaults. Liquidity We assess Reclam's liquidity as "weak" under our criteria. We estimate that there will be a material deficit of liquidity over the 12 months to Feb. 1, 2013, when the EUR152.9 million notes are due. A bilateral credit line with Nedbank Group Ltd. (BBBpi; unsolicited rating) also expires in February 2013, and it is uncertain as to whether banks would extend it beyond that date. Assuming no future dividends from Reclam's subsidiary Grandwell Holdings Ltd. (Grandwell), we project the following sources of liquidity as of March 31, 2012: -- ZAR280 million cash, excluding ZAR74 million at Grandwell; -- ZAR83 million under Reclam's ZAR322 million bilateral credit line, which is available until Feb. 1, 2013; -- Cash flow from operations from the recycling division of about ZAR180 million until March 31, 2013; and -- No contribution from the diamonds division. We project the following uses of liquidity as of March 31, 2012: -- ZAR1,573 million (EUR152.9 million) notes due on Feb. 1, 2013; -- ZAR84 million of other long-term debt maturities, excluding a ZAR51 million shareholder loan, which is nonrecourse to Reclam and which it will pay using funds from the diamond operations. -- ZAR80 million in capex until March 31, 2013, of which maintenance capex should be ZAR15 million-ZAR20 million per year. -- No working capital outflow, assuming the preservation of the current trade receivables program between Reclam and its parent, and the recent agreement with key customers to extend the payment period. If these agreements are not upheld, Reclam would be required to invest more than ZAR150 million in working capital. Although Reclam may receive further dividends from the diamond business over the coming quarters, we have limited visibility on the diamond operations and on Reclam's ability to control dividends. In the 18 months to March 31, 2012, Reclam received net dividends (after netting rights issues) of ZAR311 million. However, we consider that further dividends from the diamond business will not change our current assessment of Reclam's "weak" liquidity. Recovery analysis The issue rating on the EUR152.9 million callable senior notes due 2013 (originally EUR253 million) issued by Reclam is 'CCC-', the same level as the corporate credit rating. The recovery rating on the notes is '4', indicating our expectation of average (30%-50%) recovery for noteholders in the event of a payment default. We value the business, excluding the diamond-mining operations, partially as a going concern and partially using a discrete asset valuation. The distressed value is highly sensitive to the asset value. In the case of a default in an environment of low scrap metal prices, recovery expectations could be materially lower than our recovery rating range indicates, as we believe that asset values substantially underpin recovery prospects. Recovery prospects could also be materially affected by the exchange rate at the time of a default. For our detailed recovery analysis, see "The New Reclamation Group Pty Ltd. Recovery Rating Profile," published Nov. 14, 2011, on RatingsDirect on the Global Credit Portal. Outlook The negative outlook reflects our view that Reclam could default by Feb. 1, 2013, if it fails to repay or refinance the notes in full and on time. We could also lower the rating if, over the coming months, Reclam asks the noteholders to extend the maturity date and/or restructure. Ratings upside could result if a refinancing package allows Reclam to establish a new capital structure such that the recycling division's cash capabilities, together with the contribution from the diamond mining division, are able to service debt over time. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Metals Industry, June 22, 2009 -- How Standard Poor's Uses Its 'CCC' Rating, Dec. 12, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- The New Reclamation Group Pty Ltd. Recovery Rating Profile, Nov. 14, 2011 Ratings List Downgraded; CreditWatch/Outlook Action To From The New Reclamation Group Pty Ltd. Corporate Credit Rating CCC-/Negative/-- CCC+/Watch Neg/-- Senior Secured Debt CCC- CCC+/Watch Neg Recovery Rating 4 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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