Fitch Downgrades Emeco Holdings, Bonds to 'B-'; Outlook Negative

(The following statement was released by the rating agency)SINGAPORE/SYDNEY, September 07 (Fitch) Fitch Ratings has downgraded Australia-based mining services company Emeco Holdings Limited's (Emeco) Long-Term Issuer Default Rating (IDR) to 'B-' from 'B+'. The Outlook is Negative. The agency has also downgraded the rating on the USD335m 9.875% senior secured notes due in 2019 to 'B-' from 'BB-', and assigned a Recovery Rating of 'RR4'. The notes are issued by Emeco Pty Ltd, are secured against the assets of Emeco group, and guaranteed by Emeco and some of its subsidiaries.KEY RATING DRIVERSWeak Medium-Term Environment: The downgrade reflects deterioration in Emeco's profitability and cash flow generation, such that its credit metrics are no longer consistent with a 'B+' profile. The prolonged weakness in global commodity markets has led to a rapid decline in revenue and shrunk Emeco's operating scale. Fitch expects Emeco's leverage to remain high at above 6x over the short to medium term. The agency expects the current environment to persist over the medium term as mining companies are likely to remain focused on cutting costs, which will negatively impact service providers such as Emeco. The Negative Outlook reflects the potential for Emeco's credit profile to deteriorate if commodity prices weaken further or remain weak for longer over the next 24 months. Liquidity Not Immediate Concern: At FYE15 Emeco had a cash balance of AUD27m, and committed undrawn credit facilities of AUD66m. These levels appear sufficient to meet maintenance capex for FY16, provided that Emeco's operating cash flows do not deteriorate further. The company's earliest debt maturity is in 2019, when the USD335m 9.875% notes mature. Emeco has no maintenance covenants on its debt, until it draws down on more than 50% of its AUD75m asset-backed loan (FYE15: 12% pledged against bank-guarantees), at which point the company is required to maintain an EBITDA interest cover of 1.25x and leverage (net debt/tangible assets net of cash) of under 65%.Cash Flows to Remain Under Pressure: Emeco's funds flow from operations (FFO) fixed-charge cover ratio weakened to 0.7x in FY15 from 1.8x in FY14. However FFO fixed charge cover improved to 1.2x in 2HFY15 driven by higher utilisation rates, particularly in New South Wales and in Chile. The company expects to cut a further AUD14m in costs in FY16, and will not incur a further AUD14m of one-off fleet mobilisation costs that were recognised in FY15. The company's ability to sustain these improvements is largely dependent on the trajectory of global commodity prices. Key near-term risks include Emeco's high exposure to the Canadian oil sands industry (27% share in FY15 revenue) and coal markets in Australia (27% of FY15 revenue), amid weak fundamentals. Challenge to Diversify: Fitch notes that Emeco may find it difficult to meaningfully diversify away from oil sands despite its best efforts, or to otherwise seek profitable opportunities for its idle fleet in the current market. Nevertheless, the agency expects Emeco's FFO fixed charge cover to remain around 1.2x over the next 12 months, provided that commodity markets do not deteriorate much more. The agency's base case is for fundamentals in most commodity markets to improve in the next 24 months. However price volatility may persist in the near term.Lower Recovery on Bond: The downgrade of the rating on the USD335m bond follows the downgrade of Emeco's Long-Term IDR, and also reflects an increase in prior ranking debt. The latter is due to Emeco securing a new AUD75m asset-backed loan in FY15 that ranks ahead of the bond during a default. The lower bond rating also reflects the sharp decline in the AUD/USD exchange rate since the bond was sold in March 2014, which places a heavier burden on Emeco in Australian dollar terms. KEY ASSUMPTIONSFitch's key assumptions within our rating case for the issuer include:- Revenue to fall by 8% in FY16 because of continued stress, particularly in Canada and Western Australia, followed by low single-digit growth overall thereafter.- EBITDA margin to remain at around 24%-26%.- Maintenance capex of AUD35m-AUD40m- No dividends to be paid over the next 24 monthsRATING SENSITIVITIESNegative: Future developments that may, individually or collectively, lead to negative rating action include:- Further contract losses and / or renegotiations in rental rates that lead to weaker cash flows, resulting in Emeco's inability to maintain FFO fixed charge cover around 1x- A material weakening in liquidity, due to continued prolonged pressure in key commodity markets Positive: Future developments that may, individually or collectively, lead to the Outlook being revised to Stable include: - Stronger fundamentals across key commodity markets that would support Emeco's ability to comfortably maintain FFO fixed charge cover at over 1.3x - Maintaining long-term leverage (adjusted debt net of cash / EBITDAR) at less than 5.5xContact: Primary AnalystHasira De Silva, CFADirector+65 6796 7240Fitch Ratings Singapore Pte Ltd6 Temasek Boulevard35-05 Suntec Tower FourSingapore 038986Secondary AnalystKelly Amato, CFAAssociate Director+612 8256 0348Committee ChairpersonVicky MelbourneSenior Director+612 8256 0325Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: leni.vu@fitchratings.com.Additional information is available on www.fitchratings.com.Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362Additional Disclosures Dodd-Frank Rating Information Disclosure Form /a Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990439Endorsement Policy /a br /br ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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