(The following statement was released by the rating agency)SINGAPORE/SYDNEY, September 05 (Fitch)
Fitch Ratings has downgraded Australia-based mining services provider Emeco Holdings Limited's (Emeco) Long-Term Issuer Default Rating to 'CC' from 'B-'/Negative Outlook. Simultaneously Fitch has downgraded the rating on the USD282m 9.875% senior secured notes due in 2019 to 'C' with Recovery Rating of 'RR5', from 'B-' with Recovery Rating of 'RR4'. The notes are issued by Emeco's wholly owned subsidiary Emeco Pty Ltd, and guaranteed by Emeco.
The downgrade follows the company's announcement on 31 August 2016 that it planned to address its capital structure. The company has acknowledged that its high leverage is unsustainable and is limiting its financial flexibility. Fitch believes that the company's capital structure review may include a restructuring or write-down of current outstanding debt. Fitch considers such an outcome as probable and has downgraded Emeco's Long-Term IDR to reflect this heightened credit risk. Fitch has lowered the Recovery Rating on the bonds to 'RR5' as the ongoing challenges in the sector have caused us to revise down the distressed enterprise value used in our recovery calculations. An 'RR5' Recovery Rating indicates a recovery of 11%-30% of current principal and related interest in our calculations. We note that the secured US dollar bonds rank behind the company's committed asset-backed loan of up to AUD75m.
KEY RATING DRIVERS
Potential Debt Restructuring: Emeco said it has appointed advisors to "assess strategic alternatives to Emeco's capital structure". The company also mentioned that "additional capital structure flexibility is necessary for sustainability going forward" and that "management is aware of the need to improve the company's resilience to external shocks and provide the flexibility to take advantage of opportunities in the market". Fitch interprets these comments as implying that Emeco's plans may include an expectation that bondholders take part in a form of debt restructuring or write-down.
High Refinancing Risk: Fitch believes that Emeco could face heightened refinancing risks on its US dollar bonds due March 2019, unless commodity market conditions improve substantially. We expect Emeco to continue to generate negative free cash flows (FCF) annually over the next few years as the prolonged weakness in global commodity markets has significantly shrunk Emeco's operating scale. Given Emeco's high leverage, cash generation is insufficient to meet the company's maintenance capex. Fitch believes that miners will continue to remain cost focused, and thus pressure on Emeco's operating cash flows will remain for some years to come.
Liquidity May Tighten Beyond 2017: Emeco's committed undrawn credit line expires in December 2017, and unless the company is able to negotiate an extension, then liquidity becomes a real concern. However Emeco's liquidity seems adequate over the next 12 months. At the end of the fiscal year to 30 June 2016 (FYE16), the company had cash of AUD24.8m and up to AUD26m of committed unutilised credit lines that can be drawn without activating maintenance covenants. These sources appear sufficient to cover our estimate of Emeco's FY17 interest cost of AUD37m, and the AUD4m of finance leases maturing over the same period. We expect Emeco to post EBITDA of around AUD45m to AUD50m in FY17 (FY16: AUD48m), which should be sufficient to cover its maintenance capex, provided this remains similar to last year's AUD35m. This is before considering potential cash proceeds from asset disposals - Emeco has earmarked a further AUD30m of assets for disposal - or a further closing-out of the company's foreign-currency hedges.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:- Flat to low single-digit revenue growth in the next two years- EBITDA margin to remain at around 25%-26%- FCF to remain negative over the next few years- Around 50% utilisation of its committed undrawn asset-backed loan until end-2017
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:- Clarification of Emeco's plans to reduce debt and rebalance its capital structure, where such plans include a creditor write-down in order to achieve a more sustainable leverage profile- A material deterioration in liquidityPositive: Future developments that may individually or collectively lead to a positive rating action include:- Fitch considers positive rating action unlikely before a formal plan to address the capital structure has been agreed
Contact: Primary Analyst Hasira De Silva, CFA Director+65 6796 7240Fitch Ratings Singapore Pte Ltd6 Temasek Boulevard#35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Kelly Amato, CFA Associate Director+612 8256 0348Committee Chairperson Vicky Melbourne Senior Director+612 8256 0325Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@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/site/re/869362Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)https://www.fitchratings.com/site/re/879564Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1011225Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011225Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31
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