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Global Credit Research - 17 Mar 2011
Approximately EUR 153.9 million of rated debt affected
Johannesburg, March 17, 2011 -- Moody's confirmed today New Reclamation Group's ("Reclam")
Caa2 corporate family rating ("CFR") and probability of default
rating (PDR), as well as the Caa2 rating of its guaranteed EUR152.9
million senior secured notes due 2013. The rating outlook is negative.
Today's rating action concludes the review for possible downgrade of Reclam's
ratings that Moody's initiated on 10 December 2010. The review
was mainly prompted by increased liquidity concerns.
"The confirmation of the Caa2 rating, factors the confirmed extension
of the company's revolving credit facility together with improvements
in the company's core non-ferrous and ferrous recycling business",
explained Moody's Vice-President Senior Analyst, Soummo Mukherjee.
This addresses the immediate liquidity concerns related to its Nedbank
facility that was previously expiring at the end of February, 2011,
and is now extended by another year to February 2012. "The negative
outlook, however, is still based on the company's ongoing
liquidity concerns, especially as it relates to the potential refinancing
risk for its senior secured note maturity in 2013," added Mukherjee.
-EUR153.9 million senior secured notes due 2013-
confirmed at Caa2 (LGD3, 44% changed from LGD4, 50%)-
issued by Reclam (Proprietary) Limited
-Corporate Family Rating: Caa2
-Probability of Default: Caa2
Outlook for all ratings is negative
Reclam's Caa2 Corporate Family Rating continues to reflect the company's
relatively small scale, with annual revenues of approximately ZAR6
billion in 2010, asset concentration and a majority of short-term
sales and supply contracts that give the company limited visibility of
Additionally, the Caa2 corporate family rating balances: (i)
the cyclical nature of the heavy metals industry (ii) foreign exchange
rate volatility risk associated with the company's mostly euro-based
debt and roughly 63.6% of revenues being generated via export
sales to international customers; and (iii) the company's client
concentrations where three customers comprise approximately 29.2%
of total sales, as well as (iv) a large market share in the South
African ferrous and non-ferrous markets, and (v) long-term
relationships, although mostly non-contractual, with
key suppliers and customers.
With the renewal of its Nedbank multi-option facility and improved
operating performance, largely due to its diamond mining operations,
the probability of a near term default has been lowered. Upstreamed
cash flows from Grandwell Holdings, a 50.01% controlled
subsidiary, which in turn has a 50% shareholding in a joint
venture in Mbada Diamonds, have played a significant role in strengthening
the company's liquidity profile. There are, however,
issues about the reliance that can be placed on these cash flows going
forward given the history of enforceability of mining rights awarded in
Zimbabwe's eastern Chiadzwa diamond fields and the non-controlling
shareholding in the operations. Removing the cash flow contributions
from Mbada Diamonds would place Reclam in a significantly less favourable
Additional liquidity pressures could result from possible mismatches in
cash inflows and outflows brought upon by a disparity in pay down of receivables
from recycled non-ferrous and ferrous metals sales and payment
for new non-ferrous and ferrous metals scrap, where the former
will be at lower unit prices and the latter at higher input prices,
due to upward trending commodity prices, thus requiring liquidity
to be injected into working capital. Reclam maintains an unhedged
currency position for its senior secured notes, which could create
a deterioration in liquidity due to higher Rand interest costs,
should any significant appreciation in Euro against the Rand result.
Reclam's management has also yet to address the repayment of principal
of the 2013 senior secured notes, nor currently have the resources
available to make such a payment.
Moody's acknowledges the success that Reclam has had from its indirect
investment in Mbada Diamonds, especially as it relates to the cash
flows received from his operation. However, we are also aware
that the investment in Mbada Diamonds poses many inherent risks and unpredictable
cash flows. The diamond operations are not considered part of the
restricted group of subsidiaries that offer senior secured noteholders
security. Meanwhile, the diamond operations, in our
view, face potential political risks that could be disrupted at
any time. Therefore, the assigned rating continues to primarily
reflect Reclam's core non-ferrous and ferrous recycling business
with limited consideration for the diamond mining operations given its
operational and structural risks.
A stabilisation of the outlook will depend on Reclam demonstrating that
it can continue to improve operating performance along with evidence of
prudent management of cash resources. Eventual upward pressure
on Reclam's ratings would only be possible once it addressed its
2013 bond maturity refinancing, combined with sustainable operating
Further downward pressure on Reclam's current Caa2 rating with a
negative outlook would be prompted over increased liquidity concerns or
significant deterioration of operating performance.
Moody's last rating action regarding Reclam occurred on December 10,
2010 when we downgraded its ratings to Caa2 from Caa1 and left all ratings
on review for further possible downgrade.
The principal methodology used in this rating was Loss Given Default for
Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
Based in Johannesburg, South Africa, The New Reclamation Group
("Reclam") is one of the largest producers of recyclable secondary
ferrous (iron-based) and non-ferrous (non iron-based)
metal in South Africa. Reclam also produces recycled glass,
paper, cardboard and plastic products, aluminium ingots and
pellets, as well as copper-sulphate chemicals. Its
products are used as input materials in industrial manufacturing processes.
These include steel, various no-ferrous metals, glass,
paper and cardboard. The company is also engaged in diamond mining
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service South Africa (Pty) Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
David G. Staples
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service South Africa (Pty) Ltd.
Moody's confirms New Reclamation Group's Caa2 rating with a negative outlook
2 Maude Street
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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