March 20 - Overview
-- The EUR152.9 million notes issued by South Africa-based recycler The New
Reclamation Group Pty Ltd. (Reclam) are now less than 12 months from their
maturity date of Feb. 1, 2013.
-- We see a risk that the company may not be able to secure financing on
time, either by issuing new debt and seeking parental support or by an equity
injection, and we have revised the company's liquidity assessment downward to
"weak".
-- We are therefore placing our 'CCC+' long-term corporate credit and
senior unsecured debt ratings on Reclam on CreditWatch negative.
-- The CreditWatch placement reflects the risk of a downgrade if Reclam
fails to finalize a clear refinancing plan. We aim to resolve the CreditWatch
placement within the next two to three months.
Rating Action
On March 20, 2012, Standard Poor's Ratings Services placed on CreditWatch
negative its 'CCC+' long-term corporate credit and senior unsecured debt
ratings on south Africa-based recycler New Reclamation Group (Reclam).
Rationale
The CreditWatch placement reflects the uncertainty around how the company will
refinance its EUR152.9 million (South African rand 1.5 billion) notes due
on Feb. 1, 2013. In our view, the refinancing risk is elevated by the notes'
exposure to foreign exchange risk and by Reclam's high leverage, exacerbated
by continued weak results from the recycling operations. Furthermore, we have
a lack of insight into the parent's ability and willingness to support the
refinancing. We have revised our assessment of the company's liquidity
downward to "weak."
In financial 2011 (ended June 30, 2011), Reclam's scrap recycling volume
decreased by 6%, which, together with higher costs of sales, translated into a
25% fall in EBITDA to ZAR300 million. This negative trend continued in the six
months to Dec. 31, 2011, with EBITDA of ZAR108 million. We also see that
competition has increased on the back of the ability of ArcelorMittal S.A. (a
subsidiary of Luxembourg-registered steel group ArcelorMittal
) to expand its scrap recycling business. In addition, the
recent drop in iron ore and coking coal prices--while scrap prices remain
stable--may shift steel production to blast furnace from electric arc furnace
(EAF), which could negatively affect Reclam as its scrap goes to EAF. This, in
our view, could lead to greater steel imports to South Africa and,
accordingly, pressure on Reclam's profits.
On the positive side, Reclam has seen increased profits from its diamond
business (Grandwell; 50.01%) in Zimbabwe, although country risk remains high.
The recent approval of Reclam's diamond mines in Zimbabwe by the Kimberly
Process (an initiative to prevent the trade of "blood diamonds") and upgrade
of the processing plant there may also boost profits. In our opinion, this
could allow Grandwell to pay dividends and may help the company meet the large
maturity next year (until December 2011; Reclam received ZAR155 million after
starting operations in 2009).
We believe that a possible solution to Reclam's refinancing issue would
require substantial support from its parent, a partial debt refinancing, and
some free cash flow. We consider the parent to have 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 high involvement in
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
the ratio of sources to uses of liquidity will be above 1.2x in calendar 2012,
but that there will be a material deficit over the next 12 months as the
EUR152.9 million notes are due in February 2013. The bilateral credit line also
expires in February 2013, and it is uncertain as to whether banks would extend
it beyond that date.
Assuming no future dividends from Grandwell, we project the following sources
of liquidity as of Dec. 31, 2011:
-- ZAR149 million cash, excluding ZAR11 million at Grandwell;
-- ZAR184 million under Reclam's ZAR322 million bilateral credit line
with Nedbank Group Ltd. (BBBpi; unsolicited rating), which is available until
Feb. 1, 2013;
-- Cash flow from operations from the recycling division of about ZAR250
million until June 30, 2013; and
-- No contribution from the diamonds division.
We project the following uses of liquidity as of Dec. 31, 2011:
-- ZAR1,535 million (EUR152.9 million) notes due on Feb. 1, 2013;
-- ZAR64 million of other long-term debt maturities, excluding a ZAR49
million shareholder loan, which is non-recourse to Reclam and will be paid
using funds from the diamond operations.
-- ZAR120 million in capital expenditure (capex) until June 30, 2013, of
which maintenance capex should be ZAR15million-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 extending the payment period. If these agreements
are not upheld, Reclam would be required to invest more than ZAR150 million in
working capital.
Recovery analysis
The senior unsecured debt rating on the EUR152.9 million (originally EUR253
million) callable notes due 2013 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 prospects for senior
noteholders in the event of a payment default.
We value the business, excluding the diamond-mining operations, partially on a
going-concern basis and partially on 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 prices, our 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 any default.
For a full recovery analysis, see "The New Reclamation Group Pty Ltd. Recovery
Rating Profile" published on Nov. 14, 2011, on RatingsDirect on the Global
Credit Portal.
CreditWatch
We aim to resolve the CreditWatch placement within the next two to three
months, after meeting with management and gaining further insight into the
company's prospects of refinancing the notes in February 2013.
A lack of a clear refinancing plan would likely result in us downgrading
Reclam by several notches.
Related Criteria And Research
-- How Standard Poor's Uses Its 'CCC' Rating, Dec. 12, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Key Credit Factors: Methodology And Assumptions On Risks In The Metals
Industry, June 22, 2009
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Standard Poor's Revises Its Metal Price Assumptions For The Short
Term And for 2013 And Beyond, June 8, 2011
Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
To From
The New Reclamation Group Pty Ltd.
Corporate Credit Rating CCC+/Watch Neg/-- CCC+/Negative/--
Senior Secured
Local Currency CCC+ /Watch Neg CCC+
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
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