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Rating Action:

Moody's downgrades Petra Diamonds' CFR to Caa2; negative outlook

16 Apr 2020

London, 16 April 2020 -- Moody's Investors Service ("Moody's") has today downgraded Petra Diamonds Limited's (Petra) corporate family rating (CFR) to Caa2 from Caa1 and its probability of default rating (PDR) to Caa2-PD from Caa1-PD. Moody's has also downgraded to Caa3 from Caa1 the rating on the $650 million guaranteed senior secured second lien notes due in May 2022 issued by Petra Diamonds US$ Treasury Plc, a wholly owned subsidiary of Petra. The outlook is negative.

The full list of affected ratings is provided at the end of this press release.

RATINGS RATIONALE

Today's rating action reflects Moody's view that Petra's credit metrics and liquidity profile will deteriorate over the coming 12-18 months, contrary to the rating agency's previous expectation of a modest and gradual improvement. The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets, including the mining sector. More specifically, the weaknesses in Petra's credit profile, including its exposure to diamond prices, has left it vulnerable to shifts in market sentiment in these unprecedented operating conditions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

The Government of South Africa in response to the pandemic initiated a 21-day lockdown effective 27 March, which has now been extended by an additional two weeks up until the end of April. As a result, Petra's mines in South Africa are operating at significantly scaled down levels while its Williamson mine in Tanzania is being placed under care and maintenance from the middle of April. The depressed diamond market conditions and production disruptions significantly heightens refinancing risk for Petra and increases the likelihood of a distressed exchange ahead of its $650 million notes which mature in May 2022.

Rough diamond prices have continued to be under pressure with the coronavirus creating a headwind against a potential recovery. We expect global consumer demand for diamond jewelry will fall in 2020, leading to a drop in demand for rough diamonds from cutters and polishers, which may in turn force miners to cut prices or further reduce production. There are currently significant disruptions in the diamond value chain, with government imposed restrictions on movement causing suspension of mining activities, cancellation of sales at diamond trading hubs, a halt in demand from polishers and cutters (ca.90% of which are located in India), and closure of jewelry shops in key markets such as China and the US.

LIQUIDITY

Petra's liquidity profile is weak in light of the significant uncertainties in the market and as the $650 million May 2022 bond comes closer to maturity. As at 31 December 2019, the company had unrestricted cash balances of $40 million and ZAR1.5 billion in undrawn credit facilities. The latter comprises of a ZAR1 billion revolving credit facility (RCF) that matures in October 2021 and a ZAR500 million working capital facility that is renewed annually.

The company has fully drawn down on its working capital facility and is in discussions with its lenders to access the RCF. Moody's forecasts that Petra will be unable to meet the financial covenant requirements under both of its credit facilities. While there is a track record of covenant amendments given Petra's strong relationship with domestic lenders, the latest being a waiver received for the 31 December 2019 test date, the current environment increases the uncertainty on the reliable access to these facilities and the terms and conditions could become more stringent.

STRUCTURAL CONSIDERATIONS

Petra's $650 million senior secured second lien notes rank behind the ZAR1.5 billion senior secured first lien credit facilities and the $49.3 million BEE loan guarantee obligation which is part of the first lien creditor class.

Moody's previously forecasted that the undrawn credit facilities will unlikely be used considering the expected free cash flow generation over the next several years. However, with operating conditions further deteriorating, Petra is likely to rely on its bank facilities for liquidity support. Moody's has therefore notched down the rating of the notes relative to the CFR to reflect bond holders ranking behind bank and BEE debt.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the very weak diamond market and pressure on liquidity which has been exacerbated by the temporary suspension of mine operations.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade would require Petra addressing refinancing risk associated with its May 2022 notes, an overall reduction in gross leverage, and an improvement in its liquidity position. Positive pressure would also require (1) an assessment of Petra's medium to long-term investment and funding requirements to extend the life of its mines; and (2) EBIT/interest expense being sustainably above 1.0x.

The ratings could be downgraded if (1) the likelihood of a distressed exchange becomes evident; or (2) there is a further deterioration in Petra's liquidity position.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Petra Diamonds Limited

.... Probability of Default Rating, Downgraded to Caa2-PD from Caa1-PD

.... Corporate Family Rating, Downgraded to Caa2 from Caa1

..Issuer: Petra Diamonds US$ Treasury Plc

....BACKED Senior Secured Regular Bond/Debenture, Downgraded to Caa3 from Caa1

Outlook Actions:

..Issuer: Petra Diamonds Limited

....Outlook, Changed To Negative From Stable

..Issuer: Petra Diamonds US$ Treasury Plc

....Outlook, Changed To Negative From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Petra is a rough diamond producer listed on the London Stock Exchange, registered in Bermuda and with its group management office domiciled in the United Kingdom. The company's primary assets are the Cullinan, Finsch and Koffiefontein underground mines in South Africa and Williamson open pit mine in Tanzania. For the last twelve months ended 31 December 2019, Petra produced 3.9 million carats of diamonds and reported $450 million in revenues.

The local market analyst for these ratings is Rehan Akbar, +971 (423) 795-65.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

Denis Perevezentsev, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
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21 1st Tverskaya-Yamskaya St.
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Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
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Client Service: 44 20 7772 5454

No Related Data.
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