Moody's Thank you Brown.
Mountain Province Diamonds Inc. -- Moody's downgrades Mountain Province Diamonds' ratings to Caa3; outlook negative
oronto, July 17, 2020 -- Moody's Investors Service, ("Moody's") downgraded Mountain Province Diamonds Inc.'s ("MPD") Corporate Family (CFR) rating to Caa3 from Caa1, Probability of Default Rating to Caa3-PD from Caa1-PD, and second lien secured rating to Caa3 from Caa1. The company's Speculative Grade Liquidity Rating ("SGL") remains SGL-4 and the outlook remains negative.
The downgrade of MPD's rating reflects Moody's view that the company will be challenged to repay its revolving credit facility as per its revolving credit facility waiver agreement [1] given the current difficult rough diamond market as the coronavirus pandemic has further weakened prices and sales volumes, as well as the increased risk that the company enters into a debt restructuring transaction. MPD has said it is [1] continuing negotiations with its major shareholder and other financial institutions to secure additional debt facilities in order to repay the current lenders and meet short term obligations.
Downgrades:
..Issuer: Mountain Province Diamonds Inc.
.... Corporate Family Rating, Downgraded to Caa3 from Caa1
.... Probability of Default Rating, Downgraded to Caa3-PD from Caa1-PD
....Senior Secured Regular Bond/Debenture, Downgraded to Caa3 (LGD4) from Caa1 (LGD4)
Outlook Actions:
..Issuer: Mountain Province Diamonds Inc.
....Outlook, Remains Negative
RATINGS RATIONALE
MPD's Caa3 CFR is constrained by 1) a lack of liquidity, 2) the elevated risk that the company enters into a debt restructuring transaction, 3) high leverage and limited financial flexibility given the weak rough diamond market, 4) concentration risk (only produces diamonds, at one mine site), 5) small relative production (3 million carats/year), of lower value diamonds (average price of $63/carat in 2019), and 6) the opaqueness of diamond pricing, including the managed supply-demand characteristics of this luxury good. MPD benefits from 1) operating in a favorable mining jurisdiction (Canada), and 2) consistent mine operation by De Beers.
MPD's liquidity is weak over the next year (SGL-4). The company had CAD32 million in cash and equivalents at March 31, 2020, against Moody's expectation that the company will have about CAD40 million of negative free cash flow over the next 12 months. The company has an undrawn US$25 million credit facility, however it matures in December 2020, so any draws would create a corresponding current liability. MPD has received waivers from compliance with financial covenants including the total leverage ratio and total net worth tests, and minimum cash balance that it would otherwise have had to satisfy as of June 30, 2020 in respect to its revolving credit facility. In exchange, MPD agreed to a reduction in the size of the revolving credit facility to US$25 million from US$50 million, the imposition of additional covenants, and a requirement to demonstrate progress by August 31, 2020 to be able to enter into a binding financing commitment by September 30, 2020 to repay the revolving credit facility. MPD's senior secured notes mature December 2022.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on MPD of the deterioration in credit quality it has triggered, given its exposure to rough diamond prices and demand, which has left it vulnerable in these unprecedented operating conditions.
The negative outlook reflects the uncertainty regarding MPD's ability to refinance its debt, and the challenges it faces in improving its capital structure in light of the depressed diamond market.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if there is increased default risk including distressed exchanges or inability to refinance its debt.
MPD's CFR could be upgraded if the company is able to address the refinancing risk associated with its revolving credit facility, and improve its liquidity position. An upgrade would also require a recovery in rough diamond prices that improves the company's profitability, whereby MPD is able to generate sustained positive free cash flow.