Johannesburg, March 03, 2009 — Moody’s Investors Service has today downgraded The New Reclamation Group (Pty) Ltd’s (“Reclam”) Corporate Family Rating (CFR) and Probability of Default Rating to Caa1 from B3.
Moody’s also lowered the rating on the EUR 253m Senior Secured Notes due 2013 to Caa1 from B3. The outlook on all ratings remains negative.
The action reflects Moody’s view that the current trading prospects and economic environment in the metals industry will continue to adversely affect EBITDA levels and free cash flow generation, resulting in
accelerated cash burn and liquidity levels that could become insufficient to meet future debt service obligations. Reliance on continued availability under lines of credit is also seen as a source of concern
in the current environment, though the company recently successfully negotiated increased lines and revised covenants.
Reclam recently released its quarterly results for the period ended 31 December 2008, noting weaker operating performance and continued lack of visibility on a potential turnaround in its core ferrous markets. The company is highly exposed to cyclicality in commodities markets and has
experienced a severe deterioration in sales and EBITDA levels. It is the company’s expectation that some recovery may occur in the next few months as a result of destocking and the need to replenish inventory levels.
The downgrades and negative outlook reflect Moody’s concern that a more prolonged downturn and cash burn will eat into existing liquidity levels going into this downturn. Notwithstanding cash balances reported at 31December 2008 of approximately R1.3 billion and a relatively small revolving facility of R250 million, providing some cushion, the absence of a recovery in ferrous demand in the short-term, may result in rapid cash depletion and ultimately an inability by Reclam to meet its debt servicing obligations.
The outlook on Reclam’s ratings is negative. Further downward pressure could be exerted on the rating if the dislocation of the steel markets and related demand extends beyond the current year. An inability to
further cut back on non-essential capex investments to preserve cash and execute further cost cuts and efficiency improvements , will also lead to further downward pressure on the rating.
Pressure to return the negative outlook to a stable outlook could occur once Reclam demonstrates that it can implement a business plan that addresses the deterioration in financial and operating performance, which in Moody’s view could also require a capital injection to avoid default.
For the assignment of this rating, Moody’s has evaluated factors we believe are relevant to the credit profile of the issuer, such as i) the business risk and competitive position of the company versus others
within its industry, ii) the capital structure and financial risk of the company, iii) the company’s exposure to volatile ferrous and non-ferrous markets and the limited visibility over how the recent drop in demand
will impact the projected performance of the company over the near to intermediate term, and iv) management’s track record and tolerance for risk. These attributes were compared against other issuers both within and outside the company’s core industry subsector and our ratings are believed to be comparable to those of other issuers of a similar credit risk.
Prior to this rating action, on December 5, 2008 Moody’s downgraded Reclam’s Corporate Family Rating (CFR) and Probability of Default Rating to B3 from B1. Moody’s also dropped the rating on the EUR 253m Senior Secured Notes due 2013 to B3 from B1.This action concluded the review for a possible downgrade commenced on November 6, 2008. The rating outlook was negative.
Headquartered in Melrose North, Johannesburg, Reclam is one of the leading producers of recyclable ferrous and non-ferrous metal products in South Africa with market leading positions in its key product lines.