Bloomberg
New Reclamation Group (Reclam) is seeking to avert a bond default partly by raising diamond output from a mine in Zimbabwe near where human rights groups allege military atrocities took place
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The scrap metal recycler has e152.8 million (R1.54 billion) of debt coming due in February next year. Standard & Poor’s (S&P), which rates the securities three steps above default, said last week that raising proceeds from Zimbabwean diamonds or obtaining bank funding might help Reclam stave off non-payment.
The bonds trade at e0.77 on the euro, up from e0.69 on May 23, when Reclam said it would talk to banks about refinancing the notes.
In the nine months to March the company raised its concession in Marange, where it mines diamonds with Zimbabwe’s government, almost sevenfold and boosted spending more than 10-fold to R487.4m.
The price “indicates investors believe there’s some value”, S&P analyst Elad Jelasko said last week.
The 12 percent increase in Reclam’s debt, rated CCC- with a negative outlook at S&P, since May 23 beat the 1.6 percent gain in Bank of America Merrill Lynch’s index of high-yield, euro-denominated bonds rated CCC and lower.
The company was looking at “local financing, offshore financing and then looking at internally generated funds, including funds generated from the diamond operations”, to refinance the debt, Reclam general manager Chris Gavrielides said last week.
The company might use “any combination” of the refinancing options it was considering, Reclam said in May.
Zimbabwe seized the Marange diamond fields from UK-based African Consolidated Resources in 2006 and the state set up separate joint ventures with Reclam’s Mbada Mining, Canadile Mining, and China’s Anjin to mine the gems.
US-based Human Rights Watch said 200 illegal miners were killed by troops in the area in 2008. Zimbabwe’s police force said it had not received reports of atrocities.
Mbada contributed $300m (R2.48bn) in revenue to the government in the past two years, the state-controlled Herald newspaper reported in May.
Reclam, which ships recycled metals to clients in Malaysia, India and Taiwan, has to repay R1.71bn of debt, including the euro bonds, by March 31 next year.
Its main sources of funding are cash flow from operations, loans from its parent company Reclamation Holdings, and facilities from Nedbank.
Old Mutual, which controls Nedbank, owned less than 6 percent in Reclam, its asset management unit said last week.
As of March 31, Reclam had used R238.8m of the R362.2m available through the Nedbank credit facilities, which end on February 1 next year.
“It’s a matter of sitting down with banks and seeing what they’re willing to offer and what we’re asking for,” Gavrielides said
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Reclamation Holdings provided Reclam’s 50.1 percent-owned unit, Grandwell, a shareholder loan of R306m in 2010 to set up Mbada in Zimbabwe. Most of the loan had been paid back, Jelasko said last week.
“This is kind of the only indication” S&P had of the financial position of the parent.
The yield on Reclam’s bonds, which have the lowest rating of any South African company debt monitored by S&P, has eased 20 percentage points to 67.2 percent since reaching a record high of 87.2 percent on May 16.
The yield on the South African government’s 5.25 percent euro-denominated notes due in 2013 have dropped 208 basis points this year to a record low of 1.20 percent on Friday. Its dollar bonds maturing in 2014 have declined 112 basis points over the same period and yield 1.19 percent.
Corporate bond sales in South Africa have increased 53 percent this year to R61bn, more than twice the pace for emerging markets globally, Bloomberg data show.
Yields on dollar-denominated corporate bonds have dropped 118 basis points this year to a record low of 4.93 percent on Friday, or 21 basis points less than the average for developing nations, JPMorgan Chase’s CEMBI indices show.
The Zimbabwean diamond business paid Reclam a dividend of R221m in the nine months to March.
An increase in these payouts “can help the company, but doesn’t cover the deficit”, Jelasko added. “You can’t assume that in a period of eight or even 12 months, they will be able to up it to something like R1bn from the diamond business.”