(The following statement was released by the rating agency) Fitch Ratings-Sydney-May 21: Fitch Ratings has affirmed Australia-based Emeco Holdings Limited's Long-Term Issuer Default Rating at 'B'. The Outlook is Stable. The rating reflects Fitch's view that Emeco has successfully integrated the two companies it acquired - Matilda Equipment and Force Equipment Pty Ltd - and its cash flow will continue to benefit from the increasing level of mining activities in Australia. We expect Emeco's FFO adjusted net leverage to improve to around 2.0x over the next three years, from 2.5x at the end of the financial year to June 2018 (FYE18), supported by continued growth in EBITDA and debt reduction under an excess cash-sweep provision. Key Rating Drivers Improving Financial Profile: We believe Emeco is well-positioned to benefit from the Australian mining sector's increase in exploration and production activity. Emeco reported Fitch-adjusted revenue of AUD224 million in 1HFY19 (1HFY18: AUD171 million) and EBITDA of AUD99 million (1HFY18: AUD61 million) on an improvement in its operating utilisation to 64% during 1HFY19 from 57% in 1HFY18, a higher rental yield, and disciplined cost management. Fitch expects the company's financial performance to continue improving over the next 12-18 months due to its larger available rental fleet, recent investments in a new fleet, most of which already have rental contracts in place, and a rational supply response from the mining and rental-equipment industries. Commitment to Deleverage: The company aims to cut leverage, measured by Emeco-defined net debt/operating EBITDA, to around 1.0x by FY21 (1HFY19: 2.1x; Emeco-defined). We believe Emeco's publicly announced commitment to deleverage and its improving financial performance increase the probability of it meeting its target and refinancing its senior secured notes on better terms during 2020-2021. The company's enhanced fleet size provides another layer of protection to senior lenders and could become an additional source of cash flow to support its deleveraging, if required. Fitch expects Emeco's leverage, measured by FFO adjusted net leverage, to improve to around 2.0x by FY20 due to its larger fleet size, the strong level of mining activity, incremental earnings and capex savings following the recent fleet investments. Exposure to Cyclical Sector: Fitch believes Emeco is susceptible to commodity-price changes and the need for large capex to expand during commodity-price upcycles. The capital-intensive nature of the equipment-rental business limits Emeco from repaying debt. Fitch believes that without equity-funded acquisitions, Emeco's growth capex would have been higher or it would have generated less cash flow, which would also limit its ability to repay debt. In addition, Emeco's bargaining power decreased during the previous downturns, reducing the visibility of its cash flows. However, Emeco is currently well-positioned within its sector and the trajectory of its leverage profile as well as its conservative financial policy counterbalance its cyclical sector exposure. Derivation Summary Emeco's rating can be comparedwith peer PT Bukit Makmur Mandiri Utama (BB-/Stable),which has better revenue visibility and a relatively stable operating profile that stem from the Indonesia-based company's long-term contracts with miners and its diversified service offerings at various production stages. Bukit Makmur also benefits from the long transition time required to switch mining contractors (around three years), which results in high switching costs for coal miners. Bukit Makmur therefore had a more stable operating profile during the previous downturn and better earnings visibility than Emeco. These factors underscore the two-notch rating differential. PT ABM Investama Tbk (BB-/Negative) has a better diversified and more integrated business model than Emeco. ABM has low-cost coal mines with an established coal-contracting business, along with its logistics and engineering businesses that provide diversification from volatile commodity prices. These factors justify the two-notch rating differential between Emeco and ABM. Key Assumptions - Operating utilisation rate remains above 60% due to strong market conditions and limited supply of equipment. - Net capex at around 20%-25% of revenue from FY20-FY22. FY19 capex is estimated to be around AUD200 million. - Emeco continues to repay debt under its excess cash-sweep provision. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - FFO adjusted net leverage below 2.0x on a sustained basis. - Successfully refinances its US dollarnotes at better terms over the next two years. Developments That May, Individually or Collectively, Lead to Negative Rating Action - Deterioration of operating performance, including shrinkage of the operating utilisation rate and loss of major contracts. - FFO adjusted net leverage exceeding 4.0x on a sustained basis. Liquidity and Debt Structure Adequate Liquidity: Emeco's next significant debt maturity is in March 2022, consisting of USD322 million of 9.25% senior secured notes issued by its wholly owned subsidiary, Emeco Pty Ltd. The company had a committed undrawn revolving facility of AUD47million and cash in hand of AUD19 million at end-2018. We expect Emeco to generate positive free cash flow over the next four years and to deleverage under its excess cash-sweep provision. Emeco Holdings Limited; Long Term Issuer Default Rating; Affirmed; B; RO:Sta Contacts: Primary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Kelly Amato, Director +61 2 8256 0348 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325
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