Approximately $4.1 billion of rated debt affected
New York, May 02, 2012 -- Moody's today downgraded Arch Coal Inc's (Arch) corporate
family rating (CFR) and probability of default rating to B1 from Ba3.
At the same time, Moody's downgraded the ratings on the company's
senior unsecured debt to B2 from B1, and assigned a Ba2 rating to
Arch's amended credit facility, which will include $1
billion secured term loan and $1 billion secured revolver.
Moody's also assigned a speculative grade liquidity (SGL) rating of SGL-3.
The outlook is negative.
Moody's took the following rating actions:
Downgrades:
..Issuer: Arch Coal, Inc.
.... Probability of Default Rating,
Downgraded to B1 from Ba3
.... Corporate Family Rating, Downgraded
to B1 from Ba3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to B2, LGD4, 69 % from B1, LGD4,
65 %
Assignments:
..Issuer: Arch Coal, Inc.
.... Speculative Grade Liquidity Rating,
Assigned SGL-3
....Senior Secured Bank Credit Facility,
Assigned Ba2, 21 - LGD2
Outlook Actions:
..Issuer: Arch Coal, Inc.
....Outlook, Changed To Negative From
Stable
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. We expect that sales volume from Arch's
Powder River Basin (PRB) business will decline by 10-15%
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 7x in 2012. We also believe that credit metrics will remain
weak in 2013, as delivered prices for thermal coal may contract
due to lower spot prices in 2012, even though Arch's substantial
contracted position for 2013 at favorable prices will mitigate this impact.
We expect that volumes of delivered coal will rebound in 2013 but are
unlikely to return to pre-2012 levels. The extent of rebound
in volumes will depend, in part, on weather and natural gas
prices. We expect that metallurgical coal prices will rebound through
the end of 2012 and beyond; however, metallurgical coal prices
are volatile, affecting stability and predictability of margins
of the company's Appalachian business.
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. As of March 31,
2011, Arch had $117 million in cash and approximately $1.6
billion available under its $2 billion revolver. Subsequent
to the proposed credit facility amendment, the full amount under
the revised $1 billion revolver will be available. The proceeds
from $1 billion term loan will be used to retire existing revolver
borrowings, to repay $450 million senior unsecured notes
of Arch Western Finance, and to increase cash balance. The
amendments to the secured credit facility will include covenant relief,
and we expect Arch to be in compliance with the revised covenants,
even though available headroom will be limited. We expect that
outstanding revolver borrowings will increase through 2013, to accommodate
negative free cash flows over that horizon.
The secured debt rating of Ba2 and senior unsecured debt rating of B2,
relative to the B1 CFR, reflect their position in the capital structure
and priority of claims in the event of default. The new secured
credit facilities will be secured by substantially all assets of the company
and its subsidiaries.
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 B1 CFR reflects 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 high leverage, high capital
expenditures, weakness in the US thermal coal markets, volatility
of met coal prices, inflationary cost pressures, and the inherent
geological and operating risk associated with mining. Furthermore,
coal mine productivity and costs have been adversely impacted by stricter
mine safety inspections and greater difficulty in permitting mines and
refuse disposal sites due to heightened environmental concerns.
The negative outlook reflects our expectation that credit metrics will
remain weak through 2013 while the domestic coal market will continue
to face challenging conditions for the foreseeable future, with
the extent of and timing of recovery uncertain. That said,
the outlook could be stabilized if we expected Debt/EBITDA ratio,
as adjusted, to trend towards 4.5x. A further downgrade
would be considered if Debt/ EBITDA is expected to remain above 5.5x
on a sustained basis after 2012, if quarterly earnings continue
to erode, or if there are substantial concerns over the company's
liquidity position or covenant compliance.
The principal methodology used in rating Arch Coal Inc 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
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
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this announcement provides relevant regulatory disclosures in relation
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rating action for securities that derive their credit ratings from the
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this announcement provides relevant regulatory disclosures in relation
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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
SUBSCRIBERS: 212-553-1653
Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades Arch Coal's corporate family and unsecured debt ratings to B1 and B2 respectively, and assigns Ba2 rating to Arch's new secured term loan; outlook negative.
