(Repeat for additional subscribers)
March 17 (The following statement was released by the rating agency)
Fitch Ratings has assigned Emeco Pty Ltd's USD335m senior secured notes due 2019 a final
rating of 'BB-' with a Recovery Rating of 'RR3'.
The final rating is in line with the expected rating assigned on 27 February
2014 and follows a review of the final documentation, which materially conformed
to the draft documentation previously received. Emeco Pty Ltd is a wholly-owned
subsidiary of Emeco Holdings Limited (Emeco, B+/Stable).
The notes are secured by the assets of the Emeco Group, and guaranteed by Emeco
and some of its subsidiaries. Proceeds from the notes will largely be used to
refinance existing debt of about AUD350m. The 'RR3' recovery rating assigned to
the notes reflects our expectation of at least a 51% value recovery for the note
holders in the event of default, based on the agency's assessment of the
liquidation value of Emeco's rental fleet and other assets under a stressed
situation. As a result, under Fitch's recovery rating methodology, the bond is
rated a notch above Emeco's Issuer Default Rating (IDR).
Emeco's ratings reflect the high sensitivity of its earnings to commodity
cycles, due to its position as a rented equipment supplier to mining companies.
The ratings also take into account Emeco's low operating leverage, Fitch's
expectation of an improvement in Emeco's financial profile, and Emeco's
flexibility in managing capex, which allows it to preserve operating cash flows
during industry downturns.
KEY RATING DRIVERS
High Cyclicality: Emeco's focus on mine production provides more stable revenues
compared to exploration and new mine development, although the ability of mining
counterparties to cancel contracts, typically between 30 to 180 days, brings
with it volatility and asset underutilization. This explains Emeco's 30% drop in
EBITDA in the financial year ended June 2013 (FY13) and Fitch's expectation of a
further 50% drop in EBITDA in FY14.
Rental Fleet Utilization to Improve: Emeco's overall utilization has trended
downwards since early 2012, driven by weak volumes in its Australian coal
business. Coal miners have been reducing overburden removal volumes in response
to weak global coal prices. Fitch does not expect this trend to continue and
expects the utilization rates of Emeco's assets to improve - Emeco's Australian
business is already showing signs of picking up. It has secured new contracts
which should help increase its utilisation rates in Australia to about 50% in
June 2014, up from 40% in the six months to 31 December 2013.
Diversification: In FY13, 61% of revenue was generated in Australia, with coal
(both thermal and metallurgical) making up 42% of revenue. Earnings derived from
Australia are volatile due to the generally high cost of Australian thermal coal
on a global scale. Coal production has remained buoyant, although coal
producers' response to weak commodity prices has been to optimize productivity
and reduce costs by lowering strip ratios, by mining in areas that require less
removal of overburden. However, Emeco's geographical diversification has helped
it redeploy its fleet of 700-odd vehicles among different industries and
regions, which underpins its ability to optimize rental fleet utilization.
High Quality Fleet: Emeco's strategy of disposing most of its equipment about
halfway through expected lifespans ensures it maintains a relatively young fleet
with low operating hours, which is attractive to mining companies. This, coupled
with the generic nature of most of its assets, aids in the resale of these
assets. Over the past seven years, the company has disposed of between AUD20m to
AUD50m of assets at generally above-depreciated value. The recurring nature of
these cash inflows helps to mitigate the volatility in operating cash flows.
Improving Financial Profile: Fitch expects Emeco to deleverage from FY14
onwards, due to both improving utilization and a substantially curtailed
expansionary capex spend. However, Emeco's leverage, as measured by net
debt/EBITDA, is likely to deteriorate in FY14, compared to 2.4x in FY13, mainly
due weak average utilization.
Positive rating action is not envisaged in the medium term. A meaningful
reduction in Emeco's portfolio risk profile, so that there is greater
geographical and commodity diversification, would be necessary before any
positive rating action were possible.
Negative: Future developments that may, individually or collectively lead to
negative rating action include:
- A failure to reduce leverage as measured by net debt/EBITDA to below 3.0x by