Scope Ratings Affirms Metalcorp B.V.’s BB- with a Stable Outlook and Withdraws the Rating

This rating action follows Scope’s review for a possible upgrade, which was initiated on 24th of April 2014. Scope simultaneously withdraws the Corporate Issuer Credit Rating (CICR) at the request of the issuer.

The BB- CICR of the Dutch metals trading and aluminium recycling company is supported by Metalcorp B.V.’s (“Metalcorp”) long-standing track record, its excellent geographical diversification and the relatively low leverage. Negative rating factors include the company’s small size in both its trading and aluminium recycling business, the volatility of cash flows in both business segments as well as the high working capital requirements which negatively impact the company’s Free Cash Flows.

Metalcorp’s EBITDA stood at EUR 7.1m in 2013 with 46% contributed from metals trading and 54% from aluminium recycling. Scope expects the company’s EBITDA to increase to EUR 12.0m by 2016 which shall be driven by the positive macro-economic environment and good growth opportunities. Business expansion will be supported by Metalcorp’s expanded cash position which shall be used as collateral that is required to obtain additional trading business. Going forward, Scope expects the company’s business mix to shift towards the low-margin metals trading with an expected EBITDA contribution amounting to 52% in 2016. Due to this business expansion, Scope anticipates Metalcorp’s Debt/EBITDA to improve to 3.0x (2013: 3.7x) by 2016 with an EBITDA Fixed Charge Cover of 1.7x (2013: 3.1x).

KEY RATING DRIVERS

Niche player with a solid track record. Metalcorp’s rating reflects its relatively small size compared to its peers in the highly competitive metal trading market and the global aluminium market. Its small size and thus limited economies of scale leave Metalcorp exposed to fluctuations in metal prices and demand which tends to lead to some volatility in cash flow generation. Scope however recognizes Metalcorp’s long track record in both segments since the 1960ies.

High cyclicality in metals trading and production but positive FFO generation expected. Metalcorp’s cash flow streams follow metal prices and demand patterns for metals. As a result, revenues and cash flows in the company’s trading division remain volatile. Nonetheless, the impact on Metalcorp’s trading margins and cash flow generation can be seen as limited. This is because Metalcorp’s trading business is pursued on a back-to-back basis. Although at a low single-digit level (EBITDA margin 2014E: 1.6%) trading margins are likely to remain relatively robust over the next few years. Nonetheless, the company’s high margin aluminium recycling division (EBITDA margin of 10.8% in 2013) makes the business model more vulnerable to external shocks with a negative impact on capacity utilisation and cost coverage, resulting in negative Free Cash Flows for Metalcorp. However, presuming favourable macro-economic conditions and a capacity utilisation of above 65% in aluminium recycling, Scope expects the group’s FFO to improve between 2014 and 2016 from EUR 2.9m to EUR 3.8m.

Excellent geographical diversification. With more than 20 offices around the globe Metalcorp follows an opportunistic trading approach. The company’s established trading platform and long-standing experience in trading various metals provides a good foundation for benefiting from different demand patterns for various metals from Aluminium to Zinc, thereby minimising the risks by being exposed to single regions or specific metals. Albeit small, the group shows a global presence and an excellent geographical diversification with 27% of its sales in Europe, 41% in Asia and 26% in America in 2013.

High working capital requirements. Due to the nature of Metalcorp’s trading business the group has high working capital requirements, which is financed by short-term debt (Trade Finance). With the expected expansion of the trading business the working capital (in absolute terms) is likely to increase further. Short-term liabilities accounted for 40% of the company’s total assets in 2013 and are likely to increase to 45% by 2016. Metalcorp’s working capital is however likely to develop in line with revenues, with a stable relation between short-term assets (inventories plus receivables) and short-term liabilities (payables plus Trade Finance). As a result, Scope does not expect any increased impact from working capital changes on the company’s operating and Free Cash Flow going forward stemming from the group’s expansion plans for the metals trading segment.

Low financial leverage and comfortable interest coverage. Metalcorp’s adjusted Debt/EBITDA (adjusted for Trade Finance short-term liabilities) stood at 3.7x in 2013. Incorporating the increase of the outstanding bond volume by EUR 20.0m in May 2014 and the anticipated growth of the company’s EBITDA, Scope anticipates the adjusted Debt/EBITDA to improve to 3.0x by 2016. FFO Fixed Charge Cover is expected by Scope to decrease to 1.5x in 2014 and 1.5x by 2016 (down from 2.9x in 2013). The weaker Fixed Charge Coverage is a result of the higher fixed charges resulting from the increased bond volume and the comparably low EBITDA and FFO generation power of the company’s significant presence in metal trading.

Sufficient liquidity to cover short term debt. Metalcorp’s liquidity profile is considered to be solid. Excluding the group’s Trade Finance positions, the interest-bearing debt amounted to EUR 46.4m in June 2014. In addition, Metalcorp had access to EUR 84.9m of undrawn committed bank facilities. The company’s cash and marketable securities available of EUR 10.8m at June 2014 comfortably cover the short-term debt maturities of EUR 6.6m until 2015. Refinancing is likely to be required when Metalcorp’s EUR 30m corporate bond (8.75%) matures in June 2018. Refinancing should be supported by Metalcorp’s relatively low leverage at this time (Debt/EBITDA 2016E: 3.0x).

Outlook
The outlook for the Corporate Rating is Stable.

About Metalcorp B.V.
The Dutch Metalcorp Group is engaged in the worldwide physical trading of metals such as steel as well as non-ferrous metals and alloys. The group operates globally with more than 20 locations around the globe. In addition, its subsidiary BAGR Berliner Aluminiumwerke GmbH is a leading European producer of high-quality secondary aluminium with a production capacity of 90 Mt. In 2013 the group reported revenues of EUR 302m with an EBITDA margin of 2.4%.

Important information

Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Florian Schoeller.

The rating analysis has been prepared by Sebastian Zank, Lead Analyst
Responsible for approving the rating action: Dr. Stefan Bund, Dr. Britta Holt, Committee Chair

Rating history
Date Rating action Rating
24 April 2014: Review for possible upgrade BB- No Outlook
12 June 2013: Initial Rating BB- Stable Outlook

Usually a credit rating is accompanied by a rating outlook, which can be Stable, Positive or Negative. The Positive and Negative outlooks would normally refer to a time period of 12-18 months. These outlooks do not necessarily signal that a rating upgrade or downgrade, respectively, will automatically follow. The probability of such a rating outcome, however, would be higher than 50%.

Information on interests and conflicts of interest

The rating was prepared independently by Scope Ratings the rated entity.

At the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating
Prospectus, Website of the rated entity, Valuation reports, other opinions, Annual reports/semi-annual reports of the rated entity, Current performance record, Detailed information provided on request, Annual financial statements, Data provided by external data providers, Interview with the rated entity, External market reports, Press reports / other public information

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the press release by the rated entity prior to publication / Modification of the press release after the examination

The rated entity was given the opportunity to examine the press release prior to publication. Following that examination, the press release was modified without impact on the rating.

Methodology
The methodology applicable for this Corporate Rating is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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