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Reclam considers going cap in hand to shareholders

Carli Cooke

New Reclamation Group, the local scrap-metal recycler that Standard & Poor’s (S&P) predicts will default, said it was considering asking shareholders for funds to repay debt.

While yields on the company’s 8.125 percent of euro-denominated notes due in February next year have jumped 71 percentage points this year to 107 percent on Tuesday, the price of the bonds has rebounded from record lows. A default would be South Africa’s first.

There had been 72 corporate defaults this year, including 39 in the US and nine in Europe, S&P said in a November 15 statement.

Reclam, as the company is known, was also looking at raising finance through term loans and using its property, plant and equipment to source funds to meet obligations on the outstanding securities, it said on November 7, after S&P cut its rating on the bonds by three steps to D, or payment default.

S&P’s action came after Reclam said it had bought back 24 percent of the debt at a discount of about 25 percent, which S&P sees as a distressed exchange.

“The company’s not in a good stage,” Jason Lightfoot at Cape Town-based Futuregrowth Asset Management said on Monday. “They could get new funders in to take existing funders out or they could talk to existing guys to see if they would roll over the positions in lieu of being paid in 2013.”

An update on refinancing would be provided by Reclam in a quarterly report at the end of the month, it said in response to questions last week, declining to comment further.

Reclam, the lowest-rated company by S&P in South Africa, was technically in default on the e116 million (R1.3 billion) of outstanding bonds, the ratings company said. S&P on Monday raised its assessment on Reclam’s long-term corporate credit rating to CCC- from selective default and maintained its default call on the euro-denominated debt, it said.

Companies in distress often restructure their obligations and offer less than the original amount pledged, according to S&P. Investors may accept these offers as an alternative to a general default, in which they stand to fare worse. S&P considers such exchanges distressed and rates the affected issue D, according to its criteria.

The buybacks were a continuation of Reclam’s policy to manage debt by repurchasing bonds in the open market when opportunities arose and they were not a distressed exchange, the company said in the November 7 statement.

Reclam, which repurchased bonds in the open market in 2008, would meet its obligations on the bonds as they fell due, it said.

Reclam bought e6.1m of bonds with cash on the open market for R45m in the financial year to June, it said on October 30. It reported a R20m gain on repurchases during the period. Reclam bought at least e31m of bonds for R254m from June 30 to October 30, it said at the time.

The company’s disclosure on bond buybacks was “poor” and it did not provide the essential information S&P needed to “fully understand the current situation”, analysts led by Elad Jelasko said in the November 7 statement.

Investors “aren’t pricing for an income stream, they’re pricing a risk”, Luke Henkeman, a fixed income analyst at Coronation Fund Managers, said in Cape Town last week. “It’s priced on what you can get back.”

Reclam, which ships recycled metal to Malaysia, India and Taiwan, said profit jumped 50 percent to R473m in the year to June. The company also spent R450m expanding its Mbada diamond-mining venture in Zimbabwe. Reclamation Holdings provided Reclam’s 50.1 percent-owned unit Grandwell a shareholder loan of R306m in 2010 to set up Mbada Mining.

Zimbabwe seized the Marange diamond fields from UK-based African Consolidated Resources in 2006 and the state set up separate joint ventures with Mbada, Canadile Mining and China’s Anjin to mine the gems.

Human Rights Watch said that 200 illegal miners were killed by troops in the area in 2008. Zimbabwe’s police force says that it has not received reports of atrocities.

Marlborough Fund Managers sold the last of its Reclam bonds some time ago, said Paul Reed, a manager at the fund.

“It’s not the most liquid of bonds,” he said from London last week. “There’s a refinancing due and the management isn’t particularly forthcoming. The original business isn’t performing well and it relies heavily on a peripheral and questionable business,” he said of the Zimbabwe diamond operations. “In the end that’s what dictated what we did.”

Yields on South Africa’s euro-denominated bonds due in May have dropped 217 basis points to 1.11 percent this year. The rand has lost 8.6 percent against the dollar this year, making it the worst performer among major currencies after Brazil’s real.

The notes trade at 86c on the euro, 33 percent higher than the one-year low on May 16. The debt has returned 22 percent this year, less than the 38 percent gain in Bank of America Merrill Lynch’s index of high-yield, euro-denominated bonds rated CCC, the fifth-weakest junk rating, and lower.

Nicolo Bocchin, a portfolio manager at Italy’s Aletti Gestielle SGR, sold the last of his Reclam holdings in September. “It went up from my benchmark and I decided to sell so as not to hold that kind of risk,” he said last week. “Yes, you can make 20 points easily, but you can easily lose 40.” – Bloomberg

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