New York, February 19, 2020 -- Moody's Investors Service, ("Moody's") affirmed
Arch Coal, Inc.'s Ba3 Corporate Family Rating ("CFR")
and downgraded the company's Speculative Grade Liquidity Rating
("SGL") to SGL-2 from SGL-1. The rating
outlook is stable.
"While we expect a very challenging year for the coal industry in
2020, Arch Coal is well-positioned with a strong balance
sheet and plans to expand metallurgical coal production in the early 2020s,"
said Ben Nelson, Moody's Vice President -- Senior Credit
Officer and lead analyst for Arch Coal, Inc.
Downgrades:
..Issuer: Arch Coal, Inc.
.... Speculative Grade Liquidity Rating,
Downgraded to SGL-2 from SGL-1
Affirmations:
..Issuer: Arch Coal, Inc.
.... Probability of Default Rating,
Affirmed Ba3-PD
.... Corporate Family Rating, Affirmed
Ba3
....Senior Secured Bank Credit Facility,
Affirmed Ba3 (LGD4)
Outlook Actions:
..Issuer: Arch Coal, Inc.
....Outlook, Remains Stable
RATINGS RATIONALE
Moody's expects a very challenging year for the coal industry in
2020. Domestic demand for thermal coal is challenged by a mild
winter season, historically low natural gas prices, and ongoing
reduction of the fleet of coal-fired power plants. A substantive
reduction in export prices has redirected coal back into the weakened
domestic market, further reducing prices in early 2020 following
a weak 2019. Likewise, metallurgical coal fell sharply in
the second half of 2019 and, while the met coal market has evidenced
some stability in early 2020, there is no near-term catalyst
for substantive and sustained price improvement. Business conditions
for the global steel industry remain weak, particularly in Europe.
Based on export metallurgical coal pricing anticipated near the midpoint
of our range of $110-170 per ton (CFR Jingtang) and incorporating
adjustments for the quality and location of the company's coal,
Moody's expects that Arch Coal's EBITDA will fall to about
$200-225 million (from $363 million in 2019 and $438
million in 2018). Credit metrics likely will soften but remain
solid for the rating with adjusted financial leverage in the range of
1.5-2.0x (Debt/EBITDA) in 2020 compared to less than
1.0x in 2019.
Moody's also believes that investor concerns about the coal industry's
ESG profile are intensifying and coal producers will be increasingly challenged
by access to capital issues in the early 2020s. An increasing portion
of the global investment community is reducing or eliminating exposure
to the coal industry with greater emphasis on moving away from thermal
coal. The aggregate impact on the credit quality of the coal industry
is that debt capital will become more expensive over this horizon,
particularly in the public bond markets, and other business requirements,
such as surety bonds, which together will lead to much more focus
on individual coal producers' ability to fund their operations and
articulate clearly their approach to addressing environmental, social,
and governance considerations.
Moody's affirmed Arch Coal's Ba3 CFR based on expectations
for: (i) meaningful discretionary cash flow generation despite a
weak market environment in 2020; (ii) funding the majority of the
estimated $360-390 million of spending for the Leer South
metallurgical coal project using internally-generated free cash
flow; and (iii) a very low net debt position that helps insulate
the company from intensifying access to capital issues in the debt capital
markets. Arch Coal reported $311 million of debt and $289
million of cash at 31 December 2019. The rating affirmation also
takes into consideration Arch Coal's ongoing portfolio transition
strategy to harvest cash from declining thermal coal businesses and invest
cash in more sustainable metallurgical coal businesses.
The Ba3 CFR reflects a diverse platform of eight coal mining assets in
the United States capable of strong cash flow generation, even during
difficult industry conditions, and conservative financial policies,
including low debt levels and good liquidity to help the company withstand
difficult industry conditions. Operational risk is a constraint
with fairly meaningful concentration of earnings and cash flow at two
specific mining sites: Black Thunder thermal coal mine in the Powder
River Basin and Leer mining complex in Northern Appalachia. Credit
quality is constrained more significantly by the inherent volatility of
the global metallurgical coal industry, ongoing secular decline
in the US thermal coal industry, and ESG factors. The rating
also takes into consideration that some mining assets have less favorable
operating prospects in the coming years and, therefore, could
be subject to more significant reclamation-related spending over
the rating horizon.
While the Leer South project is a credit positive development in the medium
term that management expects will add 3 million tons of metallurgical
coal production to help Arch reach an annual met coal production capacity
of about 9 million tons by 2022, Moody's downgraded the company's
SGL rating to SGL-2 from SGL-1 based on an expectation that
a substantial increase in project-based capital spending during
weaker market conditions will result in negative free cash flow generation
for Arch Coal in 2020. Moody's believes that Arch Coal will
allow available liquidity fall below $400 million, including
cash moving below $250 million, in 2020 unless the company
pursues additional financing or market conditions improve beyond our current
expectations.
The SGL-2 reflects our expectation for good liquidity to support
operations over the next 12-18 months. The primary source
of liquidity beyond internally-generated free cash flow is the
company's cash balance combined with modest availability under an
accounts receivables securitization facility and an unrated inventory-based
revolving credit facility. The SGL rating does not assume market
access and, therefore, discounts the facilities based on the
expectation that successful execution of a planned joint venture with
Peabody Energy, which remains subject to regulatory approvals,
will close and transfer collateral currently supporting these facilities
to the new entity. However, the company reported $123
million of availability under these facilities at 31 December 2019 and,
combined with balance sheet cash, more than $400 million
of available liquidity. The SGL rating could be downgraded to SGL-3
if available liquidity falls below $250 million.
Environmental, social, and governance factors are important
factors influencing Arch's credit quality. The company is
exposed to ESG issues typical for a company in the coal mining industry,
including increasing global demand for renewable energy that is detrimental
to demand for thermal coal, especially in the United States and
Western Europe. From an environmental perspective the coal mining
sector is also viewed as: (i) very high risk for air pollution and
carbon regulations; (ii) high risk for soil and water pollution,
land use restrictions, and natural and man-made hazards;
and (iii) moderate risk for water shortages. Social issues include
factors such as community relations, operational track record,
and health and safety issues associated with coal mining, such as
black lung disease. Arch Coal has been reducing exposure to thermal
coal, which carries greater ESG-related risks, and
increasing exposure to metallurgical coal, which carries lower ESG-related
risks, through capital investment in the Leer South project.
Arch Coal sold its last thermal coal mine in Appalachia in December 2019
-- a surface mine called Coal-Mac -- and announced the
intention to put its thermal coal mines in Colorado and the Powder River
Basin region into a joint venture operated by Peabody Energy in June 2019.
Governance-related risks are representative of a publicly-traded
coal company. However, while Arch returned more than $900
million of cash to shareholders since late 2017, the company has
maintained a very modest net debt position and a good liquidity position
comprised largely of balance sheet cash.
The stable outlook assumes that Arch Coal will generate around $200-225
million of EBITDA, maintain net debt below $100 million,
and, despite significant expansionary capital spending, maintain
good liquidity in 2020. An upgrade is not likely given the inherent
volatility in the global metallurgical coal industry, ongoing secular
decline in demand for US thermal coal, and intensifying ESG concerns.
Moody's could downgrade the rating with expectations for adjusted
financial leverage above 3.0x (Debt/EBITDA), negative free
cash flow in 2021, substantive deterioration in liquidity,
or further intensification of ESG concerns that call into question the
company's ability to handle upcoming debt maturities.
Arch Coal is one of the largest coal producers in the United States.
The company has two mining complexes in the Powder River Basin,
four mining complexes in Appalachia, and two more mines in Illinois
and Colorado. The company generated about $2 billion of
revenue in 2019.
The principal methodology used in these ratings was Mining published in
September 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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.
Benjamin Nelson
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
