Approximately $4.1 billion of rated debt affected
New York, June 27, 2012 -- Moody's today downgraded Arch Coal Inc's (Arch) corporate family rating
(CFR) and probability of default rating to B2 from B1. At the same
time, Moody's downgraded the ratings on the company's senior unsecured
debt to B3 from B2, and ratings on secured credit facility to Ba3
from Ba2. The Speculative Grade Liquidity rating of SGL-3
is unchanged. The outlook is stable.
Moody's took the following rating actions:
Downgrades:
..Issuer: Arch Coal, Inc.
.... Probability of Default Rating,
Downgraded to B2 from B1
.... Corporate Family Rating, Downgraded
to B2 from B1
....Senior Secured Bank Credit Facility,
Downgraded to Ba3, LGD2, 23% from Ba2, LGD2,
21%
....Senior Unsecured Regular Bond/Debenture,
Downgraded to B3, LGD4, 67% from B2, LGD4,
69%
..Issuer: Arch Coal, Inc.
....Outlook, Changed To Stable From
Negative
RATINGS RATIONALE
The downgrade reflects our expectation that Arch's credit metrics will
contract and liquidity will deteriorate in 2012, due to challenges
facing the company's thermal coal business and the softness in the metallurgical
coal market. The company has recently announced plans to curtail
production in Kentucky, Virginia and West Virginia, reducing
Appalachian thermal coal production by more than 3 million tons annually.
We also expect that sales volume from Arch's Powder River Basin (PRB)
business will decline by 12-16% in 2012 as compared to 2011,
while the margins will contract in the Appalachian business on lower metallurgical
coal prices and higher costs, even as the mix of sales shifts in
favor of met from thermal.
We expect that Arch's Debt/EBITDA, as adjusted, will be in
excess of 8x in 2012, while EBIT will approach break-even.
We also believe that credit metrics will deteriorate further in 2013,
as volumes will likely remain suppressed into 2013, while delivered
prices for thermal coal will contract due to lower spot prices in 2012.
We expect metallurgical coal market to remain soft for the next several
months, due to the ongoing sovereign crisis in Europe and slowing
growth rates in steel production in China. This will limit the
extent to which metallurgical coal business can offset the margin compression
experienced on the thermal side. We expect negative free cash flows
in 2012 and 2013.
The SGL-3 liquidity rating reflects our expectation that over the
next twelve to eighteen months, Arch will have sufficient liquidity,
but that the liquidity position will deteriorate. Subsequent to
the May closing of the $1.4 billion term loan and subsequent
repayment of the existing revolver borrowings and $450 million
senior unsecured notes of Arch Western Finance, Arch had in excess
of $500 million in cash and full availability of $600 million
under the amended credit facility. Even though credit facility
amendments included covenant relief, we expect that absent robust
recovery in metallurgical coal markets, the headroom under covenants
will be tight in 2013. We expect that outstanding revolver borrowings
will increase through 2013, to accommodate negative free cash flows
over that horizon.
The deterioration in Arch's financial performance is largely driven by
the market conditions and challenges facing the US thermal coal industry.
Unusually warm weather in the US and low natural gas prices in 2011-2012
led to a collapse in coal prices across most coal producing regions and
production cuts across the industry, with utilities decreasing their
coal-fired generation in favor of lower-priced gas.
For the longer term, sustainable low natural gas prices, combined
with environmental regulations disadvantaging coal, will slowly
continue to erode coal's position as a raw material for electric generation.
Arch's B2 CFR continues to reflect its geographic and operating diversity,
low level of legacy liabilities, extensive high quality and low-cost
reserves, and access to multiple transportation options.
Factors that constrain the rating include highly levered capital structure
subsequent to the ICG acquisition.
A further downgrade would be considered if Debt/ EBITDA is expected to
remain above 6x on a sustained basis, if free cash flow is persistently
negative, if quarterly earnings continue to erode, or if there
are substantial concerns over the company's liquidity position or covenant
compliance.
While upward momentum to the ratings is limited due to industry conditions,
an upgrade would be considered if we expected Debt/EBITDA ratio,
as adjusted, to trend towards 4.5x and free cash flows to
be positive.
The principal methodology used in rating Arch was the Global Mining Industry
Methodology published in May 2009. Other methodologies used include
Loss Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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Anna Zubets-Anderson
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
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Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
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Moody's downgrades Arch Coal's CFR to B2 from B1; outlook stable.
