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Rating Action:

Moody's has downgraded NWR's CFR to C; negative outlook

28 Apr 2016

Rating on senior secured notes is downgraded to Ca

London, 28 April 2016 -- Moody's Investors Service (Moody's) has today downgraded the corporate family rating (CFR) and probability of default rating (PDR) of New World Resources N.V. ('NWR') to C and to C-PD respectively, from Caa3 and Caa3-PD. Concurrently, Moody's has downgraded the rating of the EUR 300 million senior secured notes due in 2020 to Ca, from Caa2. The outlook on all ratings is negative.

RATINGS RATIONALE

The downgrade of the CFR of NWR to C reflects Moody's expectation that the company is highly likely to default in the near future and that, under a default scenario in the current market, the likely recovery rates across the debt capital structure will be very modest.

Moody's current assessment of materially increased likelihood of default follows the recent indication by NWR, in its press release dated 25th of April 2016, that its super senior credit facility ('SSCF') standstill and waiver agreement has expired and events of default under certain terms of the SSCF have occurred and are continuing. This means that the company is now exposed to the risk of cross default and cross acceleration with other debt instruments, including the Export Credit Facility and the senior secured notes. As yet it does not appear there has been an actual missed debt service payment, noting that the terms of the notes allow for the coupon to be paid in kind, nor any other event which would fall within Moody's definition of default. The company also indicates that unless support from the Czech Republic government (A1 stable) or the shareholders is forthcoming by 29 April, the directors will have to consider an insolvency filing, and that in the weeks ahead it may not have sufficient liquidity to pay workers' salaries.

The deterioration of the coal market environment during 2015, and the recent indication by NWR that average prices achieved in Q1 2016 for its thermal and metallurgical coal sales were 16% and 15.5% lower compared to Q1 2015, highlight that this will be another challenging year for the company, with no recovery in sight. These negative market and industry developments are exacerbating the structural vulnerabilities of the company. Such structural weaknesses relate to an unsustainable capital structure, which is burdened by too much debt, and loss making mining operations, which are characterized by still very high fixed costs, notwithstanding ongoing cost-cutting and efficiency initiatives being implemented by management to lower the average cash cost position of the mines.

These adverse conditions clearly make it harder for management to find an agreement with all its main stakeholders, including the Czech government for a new and now urgently needed operational and financial restructuring.

Even if a restructuring deal were to be agreed at the last minute, Moody's believes NWR's ability to fund operations through to completion of such financial restructuring (where new meaningful cash resources could be injected into the group) is uncertain and highly dependent on the timeframe for securing such agreement. Furthermore, with no sustained recovery of coal prices in sight, it would be unrealistic to expect a swift reversal of the cash burn trend, which has most likely accelerated since the start of 2016 due to the lower average realized prices than a year ago. Without new urgent liquidity from external sources, the company will also most likely breach its minimum EUR 40 million cash balance covenant under its SSCF on the June 2016 testing date.

The Ca rating of the senior secured notes represents a one-notch uplift from the CFR, which reflects the priority ranking status of the secured bondholders relative to other creditors in the event of default. At the same time, the Ca rating on the notes is constrained by Moody's assumption of a very low overall family recovery rate, negatively impacted by the EUR 199 million asset impairment reported by the company on its 2015 audited accounts, and by expectation that further asset impairments may be looming. The notes' Ca rating also reflects their effective subordination to EUR 35 million SSCF, plus accrued interests, which will be repaid first in a scenario of enforcement of the collateral.

The negative outlook reflects Moody's view on the probability of default of the company within a short timeframe, combined with the possibility of a lower than expected recovery for secured noteholders under a scenario of liquidation, also considering the weak market environment for coal, making the company's mining operations -- currently loss making - potentially less attractive.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's does not expect any positive rating pressure in the near term, unless the company can secure in a very short timeframe the funding needed to improve its liquidity and enable a credible operational turnaround plan. Positive rating pressure would also require a sustained recovery in the reference coal markets.

The ratings are already very low in the scale so there is limited scope for a further downgrade except on the notes, if recovery expectations weaken further.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in the United Kingdom, NWR is the largest hard coal mining group in the Czech Republic through its subsidiary OKD, a.s. The company has four operating coal mines which during 2015 led to annual sales of 8mt of coal. The company reported consolidated revenues of EUR 630 million in 2015. The company is currently owned by its secured bondholders, after the previous majority owner, investment company CERCL Mining Holdings BV, exited completely in March 2016, by transferring for nil consideration its c. 51% equity stake to NWR in order to try facilitating the restructuring negotiation process, which started at the beginning of 2016.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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.

Gianmarco Migliavacca
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's has downgraded NWR's CFR to C; negative outlook
No Related Data.
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