TEXT-S&P raises New Reclamation Group to 'CCC-'

Mon Nov 26, 2012 12:15pm EST

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Overview
     -- South-Africa based recycler New Reclamation Group Pty Ltd. (Reclam) 
recently announced that between April and October 2012, it acquired 24% of its 
outstanding senior secured notes in the open market at a significant discount 
of about 25%. We considered this buyback to constitute a distressed exchange. 
     -- In accordance with our criteria, we change our long-term corporate 
credit rating of 'SD' (selective default) after an issuer's distressed 
exchange to reflect its new capital structure. 
     -- We are therefore raising our long-term corporate credit rating on 
Reclam to 'CCC-' from 'SD' to reflect our view of the risks associated with 
Reclam's need to refinance its outstanding senior secured notes and our belief 
that a default is inevitable within the next two months.
     -- At the same time, we are affirming our issue rating on Reclam's senior 
secured notes at 'D' to reflect the possibility of further note buybacks.
     -- The negative outlook reflects our view of a possible default by Feb. 
1, 2013, if Reclam fails to refinance the remaining outstanding senior secured 
notes. 

Rating Action
On Nov. 26, 2012, Standard & Poor's Ratings Services raised to 'CCC-' from 
'SD' (selective default) its long-term corporate credit rating on South-Africa 
based recycler New Reclamation Group Pty Ltd. (Reclam). 

At the same time, we affirmed our issue rating on Reclam's remaining EUR116 
million senior secured notes at 'D' (default). The recovery rating on the 
senior secured notes remains unchanged at '4', indicating our expectation of 
average (30%-50%) recovery in the event of a payment default.

Rationale
The upgrade reflects Reclam's new capital structure after its acquisition, 
between April and October 2012, of 24% of its outstanding senior secured notes 
in the open market at a significant discount of about 25%. We considered these 
buybacks to constitute a distressed exchange. In accordance with our criteria, 
we change our long-term corporate credit rating of 'SD' (selective default) 
after an issuer's distressed exchange to reflect its new capital structure. 

The 'CCC-' rating reflects our view of the ongoing risks associated with 
Reclam's need to refinance its outstanding EUR116 million senior secured notes 
and our uncertainty about whether the group will change its capital structure 
before the notes mature on Feb. 1, 2013. Despite the fact that Reclam has 
repaid 24% of the EUR153 million notes that were previously outstanding, the 
company has yet to secure a refinancing for the remaining amount of the notes, 
which is substantial. In our view, on the basis of currently available 
information, a default is inevitable within the next two months.

The affirmation of our 'D' issue rating on the outstanding EUR116 million senior
secured notes reflects our view that Reclam is highly likely to undertake 
further buybacks in the coming weeks. We consider such buybacks to constitute 
distressed exchange offers under our criteria. 

During its public investor call on Oct. 31, 2012, management mentioned that 
the buybacks between April and October this year were funded by internally 
generated cash and unsecured borrowings with a maturity profile that extends 
beyond the maturity of the notes and is not conditional on the conclusion of 
any other refinancing. However, we consider that this disclosure lacks detail 
and is insufficient to fully understand the current situation. At this stage, 
we have limited visibility on Reclam's plans to refinance the notes. We 
understand that Reclam is considering different options, including raising new 
secured debt and undertaking further note buybacks.

As of June 30, 2012, Reclam had outstanding debt of South African rand (ZAR) 
1.9 billion, of which ZAR1.7 billion related to the senior secured notes due 
Feb. 1, 2013. Assuming that Reclam was able to raise a new credit facility to 
fully fund the recent buybacks, these funds, together with existing cash on 
the balance sheet and cash from operations, would still leave a liquidity 
shortfall of about ZAR1 billion by the end of January 2013.

Liquidity
We assess Reclam's liquidity as "weak" under our criteria. We estimate that 
there will be a material liquidity deficit over the period between July 2012 
and Feb. 1, 2013, when the EUR116 million notes are due and a ZAR163 million 
bilateral credit line with Nedbank Group Ltd. (BBBpi; unsolicited rating) 
expires.
We project the following sources of liquidity as of June 30, 2012:
     -- ZAR20 million received from the diamond division until Oct. 30, 2012. 
Given the lack of visibility on the diamond business, we do not factor in 
further dividends from this business to Reclam.
     -- Cash flow from operations from the recycling division of up to ZAR100 
million (representing a run-rate of ZAR180 million a year); and
     -- Negligible cash on the balance sheet, after excluding the cash related 
to Reclam's diamond subsidiary Grandwell. However, we have no insight as to 
how much of this amount Reclam used for the note buybacks between July and 
October this year. 

Corresponding liquidity needs include the EUR116 million in senior secured notes
and ZAR163 million of bank debt outstanding due on Feb. 1, 2013. In addition, 
because the senior secured notes are unhedged, and because the functional 
currency is rand, while the company issued the notes in euros, the total 
outstanding amount can change materially. We do not anticipate that Reclam 
will undertake significant capital spending in the seven months to February 
2013.

Recovery analysis
The issue rating on the outstanding EUR116 million callable senior notes due 
2013, issued by Reclam, is 'D'. 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. The 'D' rating reflects possible buybacks in 
future, at materially lower prices than the previous buybacks. 

We value the business excluding the diamond-mining operations partly as a 
going concern and party 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, recoveries could be materially lower 
than our recovery rating range indicates, because we believe that asset values 
substantially underpin recovery prospects. Recovery prospects could also be 
materially affected by the exchange rate at the time of 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 senior secured notes in full and 
on time, or if noteholders are forced to extend the maturity date.

We could revise the outlook to stable if Reclam is able to put a refinancing 
package in place and establish a new longer-dated debt structure such that the 
recycling division's cash capabilities, together with the contribution from 
the diamond mining division, are able to service the debt over time. 

Related Criteria And Research
     -- New Reclamation Group Corporate Credit Rating Lowered To 'SD' On Note 
Buybacks, Nov. 7, 2012
     -- The New Reclamation Group Pty Ltd. Recovery Rating Profile, Nov. 14, 
2011
     -- Rating Implications Of Exchange Offers And Similar Restructurings, 
Update, May 12, 2009
     -- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 
1, 2012 
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Metals 
Industry, June 22, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Upgraded; CreditWatch/Outlook Action
                                        To                 From
The New Reclamation Group Pty Ltd.
 Corporate Credit Rating                CCC-/Negative/--   SD/--/--

Ratings Affirmed

The New Reclamation Group Pty Ltd.
 Senior Secured Debt                    D                  D
  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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