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Reclam’s bonds ride diamond adventure

SINCE breaking out in 2006, the battle over Zimbabwe’s massive Marange diamond field has drawn the attention of numerous regional power brokers and the scrutiny of non-governmental-organisations ranging from the Kimberley Process to Human Rights Watch.

A very different constituency is tracking the conflict on trading desks of the London and other European financial capitals –– the owners of high yield bonds issued by New Reclamation Group (Reclam).
Nominally a South African scrap metals recycler, Reclam switched gears dramatically last year when it partnered with a government entity to exploit the Marange mines despite an ongoing legal dispute. The core of that court fight –– Zimbabwe’s forceful appropriation of the fields – is unlikely to be resolved anytime soon.
Several holders of Reclam’s 153 million euro bond –– with a coupon rate of 8,125% that matures in 2013  — said they expect the company’s alliance with Zimbabwe’s authoritarian regime to trump any adverse court rulings. It is far less certain whether revenue from Marange diamond sales would actually upstream to the parent company backing the 8,125% notes.
Reclam sold 245 million euros of the bonds in 2006 via Citigroup to a cross-section of institutional investors. Many of those accounts sold out in 2008 as the spot price of ferrous metals plummeted, or in early 2009 when Moody’s Investors Service cut its rating of the bonds to Caa1 from B3 citing adverse commodity pricing, according to former holders interviewed by Debtwire.
That trading left the outstanding debt in the hands of distressed debt and risk-hungry hedge funds, some of whom bought in as low as 30. The notes rebounded in line with the rest of the high yield market, hitting 87 in early November 2009. Shortly thereafter news of the company’s off-piste venture into diamond mining in politically unstable and notoriously corrupt Zimbabwe caused the bonds to slide back to the low 60s.
The notes have since rallied to the low 70’s on the back of perceptions that the deal could pay off for Reclam and ease its liquidity crisis. While fourth quarter earnings rebounded on a year-on-year basis from the troughs of the downturn, they dipped sequentially compared to the previous quarter.
Earnings before interest taxes depreciation and amortisation (EBITDA) for the quarter ending December 31 2009 was R49,8 million, an 81% rise on the same quarter in 2008 but barely half the R91,7 million generated in the previous quarter.
Hit by a R150 million part prepayment to settle a currency hedge that was R564 million out of the money at its February 1 expiry date, and the R196,7 million of cash plowed into Mbada Diamonds, Reclam’s cash position dwindled to R28,5 million by the end of 2009, compared to R307,3 million the previous quarter and R1,356 billion the year before.
But it remains unclear when or whether revenues from Marange diamond sales will flow through to Reclam’s coffers. The scrap seller invested in the mines by making an inter-company loan to Grandwell Holdings, an unrestricted subsidiary, which in turn invested in the diamond operation.
“There are a lot of corporate governance issues here, this deal is pretty shady,” a third bond holder commented. “The investment seems to have been made outside of the restricted group, so there are no assurances that any cash flows will come back into the business”. –– FT.

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