Ratings agency Standard & Poor’s (S&P) Global has raised its long-term issuer credit rating on London-listed Petra Diamonds to ‘B-‘ from ‘D’, after the company reduced its debt by $375-million and extended its maturities for the next two years.
S&P forecasts that Petra’s ratings-adjusted debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) will fall below four times for its financial year ending June 30, following the company’s restructuring activities.
“We think the company will need to direct cash flows toward reinvestment in the coming two years to ensure that production levels are sustained.”
S&P notes that Petra’s capital expenditure of below $30-million in the 2021 financial year is below the level required to sustain long-term production. The agency believes Petra will need to restore expenditure to more than $70-million a year from the 2022 financial year to make up for low spending previously.
The ratings agency also assigned its ‘B-‘ issue rating to Petra’s new $337-million senior secured notes due in 2026. The recovery rating of ‘3’ indicates moderate recovery prospects in the event of a payment default.
The negative outlook which the agency assigned Petra, however, reflects the view that production challenges and covenant headroom concerns could materialise over the next 12 to 18 months.
S&P believes that Petra’s restructuring has stabilised its capital structure by eliminating debt through an equity conversion, as well as reducing the overall interest burden.
Petra’s new capital structure comprises a $120-million first-lien secured term loan and revolving credit facility, expiring in 2024. The facility will amortise with payments due on a quarterly basis starting in mid-2021; and the $337-million five-year senior second-lien secured notes due 2026.
Meanwhile, S&P projects that Petra will generate Ebitda of between $110-million and $140-million from the current financial year through to the 2023 financial year, and that diamond price seasonality and exchange rate risks will remain.
S&P could lower its rating on Petra if diamond prices unexpectedly fell to cycle-lows experienced in 2019 and 2020, or if the rand unexpectedly strengthened against the dollar, such that debt to Ebitda increases above five times.
For now, the agency expects Petra to deliver a debt-to-Ebitda ratio of below four times and funds from operations to debt above 20%.
Moreover, S&P says it could revise its negative outlook for the company to stable, should the company soon deploy capital expenditure accordingly for sustainable long-term production and reduce the risk of a covenant breach as a result of a broader diamond market price recovery, or improved production.