Reclam Imperils Market as Debt Falling Due: South Africa Credit

New Reclamation Group (Pty) Ltd., South Africa’s lowest-rated company by Standard & Poor’s, is jeopardizing investor sentiment toward the nation’s bond market on concern it’s struggling to repay debt maturing next week.

Reclam, as the Johannesburg-based company is known, has to repay 149.5 million euros ($199 million) of debt on Feb. 1, according to data compiled by Bloomberg. Yields on the company’s notes, rated default by S&P, surged to a record 3,058 percent by 4:20 p.m. in Johannesburg from 35 percent a year earlier. South Africa’s euro debt due May 16 fell 61 basis points to 0.94 percent today, within 14 basis points of a record low reached Jan. 4.

Reclam, which exports scrap metal and has a diamond-mining venture in Zimbabwe, said Nov. 7 it will ask its owners to fund the repayment. On the same day, S&P cut its rating on the notes three steps to D, or payment default, after the company said it bought back 24 percent of the debt at a discount of about 25 percent, which S&P said it considered as a distressed exchange.

“There could be a sell-off of South African bonds in the offshore market as a result of a Reclam default,” Jana Kershaw, a credit analyst at FirstRand Ltd.’s Rand Merchant Bank in Johannesburg, said in an e-mail. “Perhaps high-yield bonds will sell off more than investment-grade notes, but from the offshore investors’ point of view, a default will be indicative of a deteriorating environment in South Africa.”

Repayment Options

Reclam General Manager Chris Gavrielides declined to comment when contacted by Bloomberg News, one of seven calls answered by the company. In two e-mailed requests for comment, he referred Bloomberg News to the company’s financial report posted on its website.

The company’s repayment options include raising funds through local or offshore term loans and using its properties, plant and equipment, Reclam said in its report for the quarter through September on its website.

A rand-denominated bank package would be the only “viable option” for Reclam to repay the bonds, RMB’s Kershaw said. “We are developing a high-yield bond market in South Africa, but the volume and credit quality of a Reclam rand bond will be too aggressive for our institutional investor market at present.”

Bond Buyback

The extra yield investors demand to hold South African dollar-denominated corporate bonds rather than U.S. Treasuries has dropped this year, slipping 2 basis points, or 0.02 percentage point, to 307 basis points yesterday, according to JPMorgan Chase & Co. indexes.

Reclam bought back a further 18.8 million euros of the bonds for 174.1 million rand ($19 million), the company said in its financial report. That’s the equivalent of 14.4 million euros, representing a 23 percent discount.

“This may have some short-term negative price impact on existing issuers” in South Africa, Jason Lightfoot, who helps manage the equivalent of $12.6 billion of fixed-income investments in Cape Town-based Futuregrowth Asset Management, said in e-mailed comments on Jan. 21.

Reclam’s bonds traded at 91.88 percent of face value today from 84 percent at the start of the year, according to data compiled by Bloomberg.

“The all-in price of the bonds has improved over the month of January, although it’s still trading at a discount.” Lightfoot said. The increase could potentially point to shareholders coming up with funding or that a refinancing opportunity has been sourced, he said.

“Both seem unlikely given the current status of the company,” he said.

Cash Flows

Reclam’s revenue for the three months through September fell 3.8 percent to 1.92 billion rand from a year earlier, it said Nov. 28. It had a negative cash balance of 66 million rand on Sept. 30 from a positive 84 million rand on July 1.

The bonds trade on the Irish Stock Exchange. The bourse hasn’t received any communication from Reclam about repayments, Ailish Byrne, the head of public affairs and communications, said in an e-mail yesterday. South Africa’s National Treasury didn’t respond to an e-mail and declined to comment on a call.

Old Mutual Plc, which is the U.K.’s third-biggest insurer, has a stake of less than 6 percent in Reclam, its South African asset management unit said in an e-mailed response to questions yesterday.

A default would prompt offshore investors to consider selling South African debt in favor of notes from other emerging markets, Kershaw said in e-mailed comments yesterday.

Rand Weakness

The rand has weakened 5.9 percent against the dollar since the start of the year, making it the worst performer among 25 emerging-market currencies tracked by Bloomberg. It strengthened 0.5 percent to 9.0023 in Johannesburg today.

Reclam’s liquidity is “weak,” S&P said in a Nov. 26 research note, where it upgraded the company’s rating to CCC-, or three levels above default. It kept the assessment on the bond unchanged at default.

Elad Jelasko, a London-based analyst with S&P, declined to comment when called on Jan. 18, referring Bloomberg News to the rating company’s Nov. 26 report.

There will be a “material liquidity deficit” from July 2012 to Feb. 1 when the bond becomes due and a 163 million-rand credit line with Nedbank Group Ltd., the lender controlled by Old Mutual, expires, S&P said.

“Given that the company is rated CCC- and the fact that they haven’t announced refinancing plans less than a month before the bond matures, I would say there is a high probability that they would default,” Kershaw said.

Before it's here, it's on the Bloomberg Terminal.