-- 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
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.
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.
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)
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
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.
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,
-- Rating Implications Of Exchange Offers And Similar Restructurings,
Update, May 12, 2009
-- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct.
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Key Credit Factors: Methodology And Assumptions On Risks In The Metals
Industry, June 22, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Upgraded; CreditWatch/Outlook Action
The New Reclamation Group Pty Ltd.
Corporate Credit Rating CCC-/Negative/-- SD/--/--
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