16th Dec 2019 18:49
(Alliance News) - Moody's Investor Service said Monday it is downgrading Petra Diamonds Ltd's corporate family rating and probability default rating to Caa1 from B3.
The credit ratings agency is also downgrading the rating on Petra's USD650 million guaranteed senior secured second lien notes to Caa1 from B3.
The outlook for both entities is stable.
"Today's rating action reflects the continued uncertainty in the pace of Petra's deleveraging trend within the context of a challenging diamond market and volatile global economic conditions. This heightens refinancing risk for Petra ahead of its USD650 million notes which mature in May 2022," Moody's said.
The base case was forecast lower following the company's first quarter trading update, which showed a 23% year on year drop in revenue and a 4% quarter-on-quarter drop in diamond prices.
Moody's added: "There are some early signs that diamond prices have bottomed out, with market conditions being supported in the near-term by major diamond producers who are showing supply discipline and medium to long-term fundamentals to be supported by a steady contraction in global diamond production."
The agency does not expect a "significant" improvement over the next 12 to 18 months, however.
"The recovery of high value stones and variability in product mix remains a key uncertainty for Petra's credit profile, but one which can provide additional upside as seen by the recovery of the 20.1ct blue diamond at the Cullinan mine and sold in November for USD14.9 million," Moody's added.
The agency noted Petra is targeting usd150 million to USD200 million of free cash flow over the next three years.
Moody's said: "Petra will need to be on track to reach these objectives in order to accumulate a cash balance necessary to meaningfully reduce gross leverage. Benefits from 'Project 2022' are expected to be most visible in 2021 and 2022 and are dependent on increased production and diamond prices not falling further."
Moody's said Petra is doing "operationally well" but is exposed to a number of factors outside its control. These factors - which reduce the visibility on future cash flow generation, Moody's said - include fluctuations in diamond prices, volatility in USD/ZAR exchange rate, and event risks related to mine operations.
Petra Diamonds closed 0.2% higher in London on Monday at 8.33 pence each.
By Paul McGowan; [email protected]
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