Emeco shrugs off ratings downgrade

Tuesday, 4 October, 2016 - 11:27

Heavy earthmoving equipment supplier Emeco Holdings has shrugged off a credit rating downgrade from Fitch Ratings, with managing director Ian Testrow saying the market should focus on the big picture of the company’s merger and restructuring plan.

Fitch has lowered its credit rating for Emeco from ‘CC’ to ‘C’, which follows a downgrade by Standard and Poor’s and a branding of its recently announced three-way merger with Queensland-based Orionstone and Victoria-based Andy’s Earthmovers as a ‘distressed exchange’ by both S&P and Moody’s.

However the company maintained that its $686 million deal provided noteholders with a full recovery for their claim, and was the best possible recovery under the circumstances it currently faces.

“Although Emeco understands the obligations that Moody’s, S&P and Fitch have to issue their respective statements on the treatment of noteholders pursuant to the transaction, I feel it is important that the broader context of the transaction not get lost with these technical announcements,” Emeco managing director Ian Testrow said.

“Post-transaction, Emeco will be in a far stronger financial position to drive shareholder value given the enhanced fleet capabilities the company will have across the Australian market.

“Moreover, because the average age of the fleet is being significantly reduced, Emeco will be in a position to reduce spending on replacement equipment, which will allow the company to generate additional cash flow for deleveraging and enhancing shareholder returns.

“Finally, as we have indicated, we believe there are substantial operating synergies that can be achieved and this added benefit to cash flow will also allow us to improve returns to shareholders.”

The three-way merger deal includes a debt-for-equity swap under which noteholders and creditors emerge with 54 per cent ownership of the combined group. 

Emeco is also planning a $20 million capital raising, which will be half underwritten by two current shareholders, private equity groups First Samuel and Black Crane.

The combined group will have debt of $490 million, but lower gearing, with debt equal to 4.4 times underlying earnings (measured as FY16 EBITDA) from 7.2 times pre-transaction.

The merged group will have about 800 machines in its rental fleet.

Mr Testrow said Emeco was currently negotiating the terms of a new $65 million debt facility, which was announced as part of the merger, to ensure it had plenty of available funds following completion of the transaction.

“We remain incredibly enthusiastic about the opportunity to implement this restructuring and merger as Emeco will be transformed into a world-class equipment rental provider that will have the ability to drive value for our customers and to create long-term value for all of our stakeholders", he said.

Emeco is being advised by Houlihan Lokey and Macquarie Capital and law firm Baker & McKenzie.

Emeco shares were 6.4 per cent higher to 6.6 cents each at 11:30am.