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. 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