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Investing.com -- Moody’s Ratings has downgraded Petra Diamonds Limited (LON:PDL)’s long-term corporate family rating (CFR) to Caa2 from Caa1 and its probability of default rating (PDR) to Caa3-PD/LD from Caa1-PD. Additionally, the rating of the notes issued by Petra Diamonds US$ Treasury Plc has been downgraded to Caa3 from Caa2. The outlook for all entities remains negative.
The downgrade is due to an increased likelihood of Petra defaulting, which may result in a distressed exchange or debt restructuring. This is specifically related to the company’s outstanding $224 million guaranteed senior secured second lien notes due in March 2026. The company’s persistently weak cash flow generation and slow recovery in production volume in a depressed diamond market environment have contributed to the increased default risk. The downgrade also takes into account the continued weakening in Petra’s credit metrics, an unsustainable capital structure, and persistently weak liquidity, which recently led to a breach of covenants.
As of December 31, 2024, Petra’s leverage increased to 9.1x gross debt/EBITDA from 4.1x as of June 30, 2024, and 2.6x as of June 30, 2023. Its EBIT interest coverage declined to negative 1.5x from negative 0.5x as of June 30, 2024, and positive 0.7x as of June 30, 2023. The decline in EBITDA and EBIT were due to persistently low diamond prices and low production from the Cullinan and Finsch mines.
The company’s unsustainable capital structure, weak liquidity, and increased likelihood of default are viewed as governance risks. As a result, Petra’s governance issuer profile score was changed to G-5 from G-4 and its credit impact score to CIS-5 from CIS-4.
The Caa2 CFR factors in Petra’s unsustainable capital structure with increasing likelihood of default as its March 2026 notes maturity approaches, its persistently weak liquidity, weakened credit metrics, small scale and operational concentration in two key mines in South Africa, and its exposure to the volatile rough diamond prices and USD/ZAR exchange rate.
The rating also considers Petra’s business restructuring plan implemented from January 2025, the company’s solid reserve base at its flagship Cullinan and Finsch mines, and a long life potential of these mines, as well as its five-year wage agreements with labor unions signed in July 2024.
The Caa3 rating of Petra’s outstanding $224 million guaranteed senior secured second lien notes is one notch below Petra’s CFR, because the notes are subordinated to the company’s ZAR1.75 billion ($93 million) senior secured first lien revolving credit facility (RCF), of which $43 million was utilized as of December 31, 2024.
Petra’s PDR has been appended with a limited default "/LD" designation due to the company’s repurchase and cancellation of the outstanding notes amounting to a principal value of $29 million, at a significant discount to their principal value. This represents a distressed debt exchange (DE) under Moody’s definition because of a simultaneous occurrence of loss to noteholders and default avoidance for the company.
The negative outlook reflects Petra’s increasing likelihood of default as its March 2026 notes maturity approaches, while the recovery path for its cash flow generation and credit metrics remains uncertain amid the continuing weak diamond market environment and slow recovery in the company’s production volume.
Given the negative rating outlook, an upgrade is unlikely over the next 12-18 months. A potential positive rating action would be dependent on the company’s ability to resolve the refinancing risk related to its March 2026 notes maturity and achieve a more sustainable capital structure, improve its liquidity, increase its production volume and restore its credit metrics.
The ratings could be further downgraded if the company fails to improve its liquidity and resolve its refinancing risk in a timely manner, further increasing the likelihood of a default, including in a form of a distressed exchange or debt restructuring.
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