OREANDA-NEWS. Fitch Ratings has downgraded Australia-based mining services provider Emeco Holdings Limited's (Emeco) Long-Term Issuer Default Rating to 'C' from 'CC'. Simultaneously the agency has affirmed the 'C' long-term rating on Emeco's USD282.7m 9.875% senior secured notes due in 2019 with Recovery Rating of 'RR5'. The secured notes are issued by Emeco's wholly owned subsidiary Emeco Pty Ltd, and guaranteed by Emeco.

The downgrade reflects the announcement of a prospective debt exchange that Fitch views as a distressed debt exchange (DDE) event, based on the agency's DDE criteria. Fitch expects part of the senior unsecured debt to be converted into subordinated instruments. If the debt exchange goes ahead, Fitch is likely to downgrade Emeco's rating to Restricted Default ('RD').

KEY RATING DRIVERS

Debt Restructuring Plan Announced: The proposed restructuring is intended to provide Emeco with a sustainable capital structure by converting part of the senior secured debt into subordinated equity. The restructure agreement also establishes a framework for Emeco to merge with two other entities - Orionstone Pty Ltd (Orionstone, unrated) and Andy's Earthmovers Pty Ltd (Andy's, unrated) - and a recapitalisation of Emeco. The creditors of Orionstone and Andy's will also participate in the debt-for-equity swap.

Under the swap, holders of Emeco's USD282.7m 9.875% 144A notes, as well the creditors of Orionstone and Andy's will give up their claims in exchange for 54% of the ordinary shares of the combined group, and a new issue of AUD473m senior secured notes with a five-year maturity and a cash interest rate of 9.25%. The new debt issue will postpone the current maturity of Emeco's notes by two years, and pay its holders a lower cash coupon.

Emeco's noteholders accounting for a face value of 45% are party to the restructure agreement. The company requires noteholders of at least 50% by number and 75% by face value to agree to the restructuring plan. As part of the restructuring agreement, Emeco will also seek to refinance its committed asset-backed loan of AUD75m, which expires in December 2017. The company expects the restructuring process to be finalised in December 2016.

Liquidity Stress Impacts Operations: Emeco's committed undrawn credit line expires in December 2017, and unless the company is able to negotiate an extension, then liquidity becomes a real concern. At the end of the fiscal year to 30 June 2016 (FYE16), the company had cash of AUD24.8m and up to AUD26m of committed unutilised credit lines that can be drawn without activating maintenance covenants. These sources appear sufficient to cover our estimate of Emeco's FY17 interest cost of AUD37m, and the AUD4m of finance leases maturing over the same period. As part of the restructuring agreement Emeco has also committed to closing out its remaining foreign-currency hedge, potentially releasing a further USD12m in available funds.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- If the company has experienced an uncured payment default

- Completion of the restructuring

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- The company requires capital to improve its liquidity, but Fitch believes that access to capital will not be available. Therefore, we do not expect the ratings to be upgraded.