CHICAGO & MONTERREY, Mexico–(BUSINESS WIRE)–Fitch Ratings has downgraded Cobre del Mayo S.A. de C.V. (CdM) ratings as follows:
–Local currency Long term Issuer Default Rating (IDR) to Restricted Default ‘RD’ from ‘C’;
–Foreign currency Long term IDR to ‘RD’ from ‘C’;
–Senior unsecured 10.75% notes due 2018 to ‘RD’ from ‘C/RR4’ and simultaneously withdraw;
–Long Term National Scale Rating to ‘RD(mex)’ from ‘C(mex)’.
Fitch’s downgrade reflects the CdM ‘s announcement of the successful completion of the exchange offer, which Fitch considers as a distressed debt exchange (DDE). Holders of approximately 95% of the US$217 million senior notes due 2018 elected to participate in the exchange.
These holders will receive US$113.2 million of new subordinated PIK notes due 2021. The exchange results in a recovery of approximately 52% of the principal for holders that elected to tender their old bonds.
Fitch has simultaneously taken various rating actions to reflect CdM’s post-exchange capital structure and the fundamental outlook of the company:
–Local currency Long term IDR to ‘CC from ‘RD’;
–Foreign currency Long term IDR to ‘CC’ from ‘RD’;
–Long Term National Scale Rating to ‘CC(mex)’ from ‘RD(mex)’.
KEY RATING DRIVERS
CdM’s ‘CC’ IDRs reflect the successful debt exchange, which has relieved cash flow pressure stemming from high debt service requirements at a time when copper prices are below CdM’s marginal production cost. The company’s new capital structure will allow for the new PIK notes to be deeply subordinated with the coupon payment being linked to the copper price. Interest payments will not begin until the copper price recovers to $2.50/lb.
Fitch expects copper prices of around $2.17/lb in 2016 and $2.35/lb in 2017. With these prices, CdM is expected to generate low EBITDA of around USD3 million in 2016, improving to approximately USD35 million in 2017 following the successful execution of the revised plan for the Piedras Verdes mine.
Fitch expects that if copper prices remain at current levels of around $2/lb for a prolonged period, the mine may be placed under care and maintenance until a sustained price recovery occurs. The ratings continue to reflect CdM’s elevated production cost position in relation to current copper prices.
KEY ASSUMPTIONS
Fitch’s key assumptions within the rating case for CdM include:
–Copper price of $2.17/lb in 2016;
–C1 cash cost of around $2/lb during 2016;
–Copper cathodes sold of approximately 23,000-24,000 tonnes in 2016.
RATING SENSITIVITIES
Fitch’s base case indicates that CdM will likely experience a continued challenging operating scenario during 2016 due to its third-quartile cost of production combined with a period of low copper prices.
A ratings upgrade is considered unlikely during the next 18 to 24 months.
LIQUIDITY
Fitch’s base case indicates cash and cash equivalents of between USD3 million to USD5 million in 2016. This amount assumes a deferral of royalty payments until 2017 and amortisations relating to capital leases. In addition, under the current indentures, the company has access to a new Super Senior Facility of USD50 million. Financial support from shareholders is no longer assumed. Other debt held by the company mainly relates to related parties and operating leases that rank senior to the new PIK notes.
Fitch downgrades the following
Cobre del Mayo S.A. de C.V.
–Local currency Issuer Default Rating (IDR) to Restricted Default ‘RD’ from ‘C’;
–Foreign currency IDR to ‘RD’ from ‘C’;
–Senior unsecured 10.75% notes due 2018 to ‘RD’ from ‘C/RR4’ and simultaneously withdraw;
–Long-Term National Scale Rating to ‘RD(mex)’ from ‘C(mex)’.
Fitch upgrades the following to reflect CdM’s post-exchange capital structure and the fundamental outlook of the company:
–Local currency IDR to ‘CC from ‘RD’;
–Foreign currency IDR to ‘CC’ from ‘RD’;
–Long Term National Scale Rating to ‘CC(mex)’ from ‘RD(mex)’.
Date of Relevant Rating Committee: [29, January, 2016.]
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=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998760
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998760
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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