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Rating Action:

Moody's assigns B3 rating to Contura's new term loan

07 Jun 2019

New York, June 07, 2019 -- Moody's Investors Service ("Moody's") assigned a B3 rating to Contura Energy Inc.'s ("Contura") a new $562 million senior secured term loan due 2024. Proceeds will be used to refinance the company's existing term loan and fund transaction-related fees and expenses. Contura's other ratings are unchanged, including B2 Corporate Family Rating ("CFR"), B2-PD Probability of Default Rating, and SGL-2 Speculative Grade Liquidity Rating ("SGL"). The outlook is unchanged at stable.

"The refinancing transaction increases financial flexibility, but represents a credit-negative development because it signals that debt reduction is likely to be less significant than would have been required under the existing credit agreement and allows the company the ability to do more aggressive shareholder returns. However, the debt is prepayable and the company will retain the ability to reduce debt in an unfavorable market environment," said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for Contura Energy, Inc.

Assignments:

..Issuer: Contura Energy, Inc.

....Senior Secured Term Loan, Assigned B3 (LGD4)

RATINGS RATIONALE

The B2 CFR is principally constrained by the inherent volatility in the metallurgical coal industry and ongoing secular decline in the thermal coal industry that make it challenging to operate with a leveraged balance sheet over the rating horizon. The rating also reflects ongoing regulatory pressures on the coal mining industry despite improved political support since late 2016, inherent geologic and operational risks associated with mining, and environmental and social risks specific to the coal industry. The rating benefits from moderate operating diversity, meaningful coal reserves, access to multiple transportation options, relatively strong credit metrics, including pro forma adjusted financial leverage in the mid-2 times (Debt/EBITDA) for the twelve months ended 31 March 2019, and good liquidity. Contura's rating also considers meaningful legacy liabilities, including some mining-specific items, such asset retirement obligations related to the impact of coal mining on the environment, and coal-specific items, such as black lung liabilities related to negative health impacts on mining employees.

Moody's expects that credit metrics will remain well-positioned for the rating over the next several quarters, including adjusted financial leverage between 2.0-2.5x (Debt/EBITDA). Moody's expects that prices for low-volatility metallurgical coal will remain above our medium term price sensitivity range of $110-$170/metric ton in the near-term, which will enable Contura to generate EBITDA meaningfully above expected fixed charges, and support significant free cash flow generation while metallurgical coal prices remain relatively high. Contura's metallurgical coal is mostly high-vol A, which has been trading recently above the benchmark for low-vol coal, and high-vol B coals that price at a discount to low-vol coals. Met coal is the dominant driver of the company's earnings and cash flow. Given the near-term expectations for met coal prices and the company's expected financial performance, combined with the company's good liquidity position, the rating incorporates some tolerance for shareholder returns using a portion of the company's excess cash balances and a portion of internally-generated free cash flow.

Contura's new term loan is expected to provide significantly more flexibility to pursue shareholder returns. The new credit agreement contains a provision that allows unlimited share repurchases if the company's pro forma total leverage ratio remains below 3.0x and does not include an excess cash flow sweep provision. The company also adopted a capital return program that allows up to $250 million of share repurchases and dividends. In exchange for greater financial flexibility, the company will pay up front fees initially and additional interest on an ongoing basis. The pricing on the new term loan is L+700 with a step up to L+800 in two years, compared to L+500 for dollar-denominated borrowings on the company's existing term loan.

The SGL-2 Speculative Grade Liquidity Rating ("SGL") reflects good liquidity to support operations over the next 12-15 months. The company has nearly $400 million of available liquidity at 31 March 2019, including $182 million of cash and, after considering $29 million of letters of credit, $196 million of availability under an undrawn $225 million asset-based revolving credit facility ("ABL"). The ABL has a minimum fixed charge coverage ratio of 1.0x that is only tested when excess availability falls below certain thresholds. The new first lien term loan does not have any financial maintenance covenants.

The stable outlook assumes that Contura will remain on track to generate at least $300 million of EBITDA on an annual basis and maintain at least $200 million of available liquidity, based on the company's current debt capitalization, capital spending plans, and financial policies. Expectations for secular decline in the US thermal coal industry and continued volatility in the metallurgical coal industry limit prospects for a rating upgrade even if key credit metrics strengthen. Moody's could upgrade the rating with a significant reduction in absolute debt, accompanied by further clarity regarding financial policies, or a material improvement in scale and business diversity that helps stabilize expected cash flow generation. Moody's could downgrade the rating with expectations for adjusted financial leverage trending above 3.5x (Debt/EBITDA), free cash flow below $25 million, or less than $100 million of available liquidity.

The principal methodology used in this rating was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Following a merger with ANR, Inc. and Alpha Natural Resources Holdings, Inc. in November 2018, Contura now operates 23 underground mines, 9 surface mines and 12 preparation plants in the Northern Appalachia and Central Appalachia regions. Contura produced about 25 million tons of coal in 2018 in Central Appalachia and Northern Appalachia regions, split about evenly between thermal coal and metallurgical coal. The company also has 65% stake in the Dominion Terminal Associates coal export terminal in eastern Virginia. For the twelve months ended March 30, 2019, Contura generated $2.2 billion in revenues.

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 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

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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