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Rating Action:

Moody's downgrades Northwest Acquisitions to Caa1; outlook negative

02 Oct 2019

Toronto, October 02, 2019 -- Moody's Investors Service ("Moody's") has today downgraded Northwest Acquisitions ULC's ("Northwest") corporate family rating (CFR) to Caa1 from B3, Probability of Default Rating to Caa1-PD from B3-PD, its first lien secured rating to B2 from B1, and its second lien secured rating to Caa1 from B3. The ratings outlook was changed to negative from stable.

"Northwest's ratings have been downgraded because the mine life of its assets does not extend much past its 2022 bond maturity date, and a challenging diamond price environment has weakened its ability to generate cash and left the company with limited internal sources to fund mine development", said Jamie Koutsoukis, Moody's Vice-President, Senior Analyst.

Downgrades:

..Issuer: Northwest Acquisitions ULC

.... Corporate Family Rating, Downgraded to Caa1 from B3

.... Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

....Senior Secured First Lien Revolving Credit Facility, Downgraded to B2 (LGD2) from B1 (LGD2)

....Senior Secured Second Lien Notes, Downgraded to Caa1 (LGD4) from B3 (LGD4)

Outlook Actions:

..Issuer: Northwest Acquisitions ULC

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Northwest's Caa1 CFR is driven by 1) weak liquidity, as its leverage covenant will again be breached in Q4 2019 unless Northwest produces a mine plan and negotiates a new covenant level, 2) a short mine life (production drops materially in 2023) coupled with the revolver maturity in November 2021 and the $550 million second lien debt maturity in November 2022, with no plan to extend mine life, 3) a continued weak rough diamond price environment that limits the company's ability to fund needed mine development, 4) new management that lacks diamond mining experience, 5) the opaqueness of diamond pricing, including the managed supply-demand characteristics of this luxury good and the disruption synthetic diamonds could have on the market, and 6) concentration risk (one mineral, two co-located mines). The company benefits from its favorable mining jurisdiction (Canada), and from cost reductions from recent restructuring efforts.

The company has weak liquidity, as it is unlikely to meet its leverage covenant in Q4/2019 and the terms of the credit facility will need to be negotiated at that time after Northwest has delivered a new mine plan to its credit facility lenders. Sources of liquidity include $75 million of cash June 2019, and $41 million of availability on its $200 million credit facility maturing November 2021 (availability has been temporarily reduced to $150 million by the credit facility lenders in the second quarter of 2019 after a covenant breach; $50 million is drawn; and $59 million in letters of credit are posted as of Q2/19). We expect that Northwest will generate $20 million of free cash flow over the next four quarters, however this does not include any spending required to extend mine life.

Following the covenant breach in Q2 2019, Northwest negotiated a revised net leverage ratio of 3.5x from 2.25x for June 30, 2019 and September 30, 2019. However the covenant step downs to 2.0x in Dec 2019, which we don't expect the company to meet. Moody's expects adjusted net debt to EBITDA of 3.2x at year end 2019.

Northwest has CAD289 million in surety bonds outstanding for reclamation obligations to the government of the Northwest Territories. Rio Tinto, the operator of the Diavik diamond mine has requested pre-funding for Northwest's 40% share of the full reclamation costs of that mine, the majority of which will be incurred post-2023 until the end of mine life. Northwest has declined to advance the requested first and second quarter 2019 installments for a total of $19 million and is in discussions with Rio Tinto to come to a solution.

Since the company was taken private in October 2017, earnings and guidance accuracy has been weak, and the lack of a plan to extend mine life remains a credit risk. Our rating does not take into consideration any support from the Washington Companies.

The negative outlook reflects the execution risk of Northwest developing a plan to extend mine life, obtaining sources to fund the development and negotiating the terms of its credit facility to prevent further covenant breaches.

The ratings could be downgraded if uncertainty increases over the company's ability to remain in compliance with its credit facility covenants past Q3/19, if operating performance fails to improve in 2020, or if management is unable to develop a credible plan for extending mine life past 2023, coupled with funding and liquidity for that plan. A downgrade would also be likely if Northwest was likely to undertake a distressed exchange of debt.

A higher rating would require Northwest to develop a credible plan for extending mine life past 2023, coupled with funding and liquidity for that plan, address its ability to comply with its credit facility covenants past 2019, and is able to execute improved operating performance, including the generation of sustainable positive free cash flow.

Northwest Acquisitions ULC, was purchased from public shareholders in October 2017, and is ultimately owned by the Roy Dennis Washington Trust. It owns an 89% interest in and operates the Ekati diamond mine and holds a 40% ownership interest in the Diavik diamond mine, operated by Rio Tinto plc., both located in the Northwest Territories of Canada. Revenues in 2018 were $700 million.

The principal methodology used in these ratings was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jamie Koutsoukis
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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