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Related Issuers
Rating Action:

Moody's Rates Arch's Second Lien Debt B3, Outlook Negative

12 Dec 2013

$300 million in debt rated

New York, December 12, 2013 -- Moody's today assigned a B3 rating to Arch Coal's new $300 million Second Lien Senior Secured Notes maturing in 2019. At the same time, Moody's affirmed all existing ratings, including the corporate family rating (CFR) of B3. The outlook is negative. The proceeds of this debt issuance, along with the $300 million Term Loan B add-on announced last week, are expected to be used to refinance the company's existing $600 million senior unsecured notes due in 2016.

The refinancing transaction will be credit positive as it will extend the maturity profile of the company's debt, enhancing its ability to withstand the prolonged weak conditions in thermal and metallurgical markets. Following the refinancing, the company's nearest debt maturity will be $1.9 billion in Senior Secured Term Loan B, including the new add-on, on May 16, 2018.

In connection with the transactions, the company will also obtain more relaxed financial maintenance covenants on its currently unutilized revolver whose size will be reduced to $250 million from $350 million. The revolver expires in June 2016. Given the revolver's minimum liquidity requirement, we do not view the revolver as a source of liquidity. But if the company were to utilize the revolver for letters of credit and its total liquidity were to fall below the minimum liquidity threshold, it would be required to fund the letters of credit, resulting in additional debt or further decline in cash.

Following the transaction, the company's predominant source of liquidity will be its $1.3 billion in cash and marketable securities. The Speculative Grade Liquidity rating of SGL-2 continues to reflect our expectation that Arch will maintain a good liquidity position, sufficient to accommodate the anticipated cash burn over the next twelve to eighteen months.

Arch's ratings reflect the recent deterioration in performance due to continuing weakness in the coal industry, and our expectation that while both thermal and metallurgical markets have reached bottom, the potential for material recovery in demand and pricing is limited. Based on our assumptions of flat thermal spot prices over the next eighteen months, and benchmark settlements for high quality metallurgical coal of about $155, we expect average realization per ton to decline in 2014 relative to 2013, with Debt/ EBITDA, as adjusted by Moody's, exceeding 15x through the end of 2014 and annual negative free cash flows in the $300 - $400 million range.

RATINGS RATIONALE

Arch's B3 CFR continues to reflect very high levels of debt in the company's capital structure, coupled with ongoing cash burn due to persistent weakness in metallurgical and thermal coal markets. The ratings also reflect the 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 also include cost inflation, regulatory pressures on coal and the inherent geological and operating risk associated with mining.

Negative outlook reflects our view that absent healthy recovery in coal prices, the company will continue to burn cash. We believe that in order for Arch's free cash flow to turn positive, coal prices in the Powder River Basin (PRB) would need to increase to $13 - $14 range (from current spot prices of around $11) and settlements for high quality metallurgical coal would have to recover to $170 - $175 range.

The B3 rating on the Second Lien Senior Secured notes reflects their position in the capital structure and priority of claims in event of default. The notes are effectively subordinated to the first lien secured debt rated B1, but have priority over senior unsecured debt rated Caa1. The Second Lien notes are secured on a second priority basis by substantially all assets of the company and its subsidiaries. The existing senior secured credit facility is secured by the same assets on the first priority basis.

The ratings could be upgraded should metallurgical and/or thermal coal prices recover, such that the company's leverage, as adjusted, is expected to track below 6x and free cash flow is expected to turn positive. A further downgrade would result if liquidity deteriorates, if cash burn does not subside, and/or Debt/ EBITDA is not expected to be sustained below 7x after 2014.

The principal methodology used in this rating was the Global Mining Industry 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.

Arch Coal is one of the largest US coal producers which operates in all of the major US coal basins. The company's production consists mainly of low-sulfur thermal coal from its Power River Basin mines and thermal and metallurgical coal from Appalachia. Over the 12 months ended September 30, 2013 the company generated $3.6 billion in revenue.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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 Rates Arch's Second Lien Debt B3, Outlook Negative
No Related Data.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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​

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