Dec 05 -
-- RCCL plans to raise additional debt to fund the acquisition of Ruetgers; the proposed issuance will rank pari passu to RCCL’s existing notes due 2018.
-- Recovery prospects will be reduced for the existing noteholders of the U.S.-based calcined petroleum coke producer, in our opinion.
-- We are lowering the issue rating on the outstanding notes to ‘BB-‘from ‘BB’ and removing it from CreditWatch with negative implications.
-- At the same time we are assigning our ‘BB-‘issue rating to the proposed senior secured notes due 2020.
On Dec. 5, 2012, Standard & Poor’s Ratings Services lowered its issue rating on the senior secured notes due 2018 issued by Rain CII Carbon LLC (RCCL; BB-/Stable/--) to ‘BB-’ from ‘BB’. We also removed the rating from CreditWatch, where it was placed with negative implications on Nov. 20, 2012. At the same time, we assigned our ‘BB-’ issue rating and ‘3’ recovery rating to the proposed issue of US$400 million and EUR210 million senior secured notes due 2020 by Rain Escrow Corp. The issue rating is subject to our review of the final documentation. RCCL is a U.S.-based calcined petroleum coke (CPC) and fully owns Rain Escrow.
We lowered our issue rating because we have lowered the recovery rating on the notes to ‘3’ from ‘2’ in view of RCCL’s plans to raise funds to acquire Reutgers N.V., a Belgium-based coal tar manufacturer. The additional debt will rank pari passu to RCCL’s existing notes due 2018. We anticipate that bondholders of the existing and proposed notes will have “meaningful” (50%-70%) rather than “substantial” (70%-90%) recovery prospects. On completion of the acquisition, RCCL and its fully owned subsidiary CII Carbon Corp. will become jointly and severally liable for the proposed notes.
In our simulated default scenario, a default could occur if RCCL’s cash flows decline materially due to a significant economic downturn that lowers demand for base metals and significantly reduces production of aluminum and specialty chemicals. Weak aluminum production will, in turn, considerably lower demand for calcined petroleum coke and coal tar pitch. At the same time, we expect prices to remain high for two key raw materials: green petroleum coke and coal tar. As a result, operating margins will be compressed, given that the company will not be able to pass through the higher costs to customers because of weak demand. We believe that, if RCCL were to default, it would be reorganized as a going concern, given the company’s good market position, valuable asset base, and long-term relations with suppliers and customers.
We expect RCCL to maintain the proceeds of the proposed notes issuance in an escrow account and use the funds only for acquisitions.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers’ Speculative-Grade Debt, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Downgraded; CreditWatch/Outlook Action
Rain CII Carbon LLC
Senior Secured BB- BB /Watch Neg
Recovery Rating 3 2
Rain Escrow Corp.
US$400 mil nts due 12/31/2020 BB-
Recovery Rating 3
EUR210 mil nts due 12/31/2020 BB-
Recovery Rating 3