Nov 12 - Standard & Poor’s Ratings Services today assigned its ‘B+’ issue rating to a proposed US$325 million senior secured Term Loan B due 2017 to be issued by Australian miner Atlas Iron Ltd.’s (Atlas Iron: B+/Stable) U.S. based special-purpose vehicle Atlas America Finance Inc. At the same time, we assigned a recovery rating of ‘3’ on the proposed issue. The rating on the Term Loan B is subject to our review of the final issuance documentation.
The recovery rating indicates our view of a “meaningful” (50%-70%) recovery for creditors in the event of a payment default. We therefore equalize the issue rating with our long-term corporate credit rating on Atlas Iron. The proposed senior secured credit facility will be distributed into the U.S. institutional term loan market and proceeds will be used for capital spending and general corporate purposes.
The absence of existing debt ranking ahead of the senior secured Term Loan B, our estimate of Atlas Iron’s valuation in a default scenario, and Australia’s creditor-friendly insolvency regime support our recovery rating on the notes. We value Atlas Iron on a going-concern basis because we believe that its cost position in the 60th percentile and mining properties would mean it would most likely be reorganized in the event of a default.
The senior secured Term Loan B is unconditionally and irrevocably guaranteed by Atlas Iron and all subsidiaries that possess income-producing mining assets. It is secured by a first lien on all of Atlas Iron’s assets, the largest of which are its Horizon I and Horizon II mining tenements. We note the company will need to obtain consent from the Federal Minister for Minerals and Energy, the Federal Minister for Lands, and from its joint-venture partner in the Mount Webber mining tenement before the security can be perfected.
The ‘B+’ corporate credit rating on Atlas Iron reflects the company’s high mineral concentration, substantial capital spending requirements, ramp-up risks, small size and reserve life, good cost position and “adequate” liquidity, as our criteria define the term. The company has a “weak” business risk profile. Atlas Iron’s high mineral concentration to iron ore and high operating leverage make its financial performance highly sensitive to volatile iron ore prices and fluctuations in the Australian dollar foreign exchange rate. Nevertheless, the company’s good cost position in the 60th percentile of the cost curve partly mitigates its mineral concentration.
We expect Atlas Iron’s financial risk profile to remain “aggressive” over the next 24 months. Atlas Iron’s high capital spending requirements will keep its free operating cash flows negative until fiscal 2015 (ending June 30) in our base-case scenario. We expect the company to lower or defer capital spending to maintain its liquidity position, if iron ore prices remain weak. But this will likely affect the pace of production growth and could ultimately reduce cash flows.
The outlook on the corporate credit rating is stable.
-- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers’ Speculative-Grade Debt, Aug. 10, 2009
-- Key Credit Factors: Methodology And Assumptions On Risks In The Mining Industry, June 23, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008