Mountain Province Diamonds Inc. Downgraded To 'CCC+' From 'B-' On Cash Flow Uncertainty And Limited Liquidity

  • We believe Toronto-based Mountain Province Diamonds Inc. (MPV) faces increased liquidity risk because of COVID-19 pandemic-related uncertainty, which affects the company's sales and cash flows amid a weak global economic outlook.
  • Considering MPV's limited liquidity sources, we view the company's long-term financial commitments as unsustainable in the absence of unexpected positive developments, increasing the risk of a refinancing or a debt restructuring.
  • As a result, S&P Global Ratings lowered its issuer credit rating on MPV and its issue-level rating on the company's second-lien secured notes to 'CCC+' from 'B-'. The '3' recovery rating on the notes is unchanged.
  • The negative outlook reflects the risk that MPV generates a free cash flow deficit in 2020 to an extent that constrains its liquidity position and increases the likelihood for a debt restructuring transaction.
TORONTO (S&P Global Ratings) March 27, 2020--S&P Global Ratings today took the rating actions listed above. The downgrade reflects our view of the increased risk to MPV's liquidity position due to the uncertainty associated with the COVID-19 outbreak. We believe MPV is at risk of depleting its cash position over the next 12 months and its revolving credit facility matures in December 2020. The company has postponed its latest rough diamond sale due to the emergence of COVID-19. It is unknown to what extent its sales and cash flows will be negatively affected by additional potential postponements or other negative market developments this year. We believe MPV's cash flows and liquidity are highly sensitive to further adverse market developments.
The company is exploring alternative sales channels but we believe there is a material risk that it would not be able to sell a sizable portion of its rough diamond production this year. In addition, a likely rough diamond oversupply in the latter part of the year (when the regular sales cycle presumably resumes) along with S&P Global Ratings' expectation for a global recession could further pressure already weak prices. For these reasons, we believe MPV could potentially face a material free cash flow deficit that significantly depletes its available cash this year.
The negative outlook reflects the risk that MPV will generate a higher-than-expected free cash flow deficit this year that significantly weakens its cash position. In our view, this could follow prolonged weakness in diamond market conditions, namely ongoing sales deferrals related to the COVID-19 outbreak, and downside pressure on diamond demand and prices. We believe this could lead to an increased risk of a liquidity shortfall or higher likelihood for a distressed exchange of its secured notes due in 2022.
We could downgrade the company if we foresee a specific default scenario for MPV over the next 12 months. In this scenario, we would expect a liquidity shortfall or expectation for the company to proceed with a distressed exchange of its secured notes. In our view, this could follow protracted sales delays, demand weakness, and lower prices that result in an estimated free cash flow deficit beyond our current expectations, or if MPV's notes trade further below par.
We could take a positive rating action in the next 12 months, if we believe the company will generate positive free cash flows and improve its liquidity position. For this to happen, we would expect resumption of the company's regular sale cycle and improvement in diamond market conditions to improve cash flow visibility and refinancing prospects of its notes maturing December 2022.
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