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Global Credit Research - 25 Jan 2011
Approximately $150 million of rated debt securities affected
New York, January 25, 2011 -- Moody's Investors Service assigned a Caa2 rating to Westmoreland Coal
Company's (WLB) proposed $150 million senior secured notes.
Moody's also assigned a Caa1 Corporate Family Rating (CFR), a Caa1
Probability of Default rating, and an SGL-3 Speculative Grade
Liquidity rating, reflecting adequate liquidity. The rating
outlook is stable. The company intends to use the net proceeds
from this offering to pay all accrued and unpaid dividends on its Series
A preferred stock, to repay certain indebtedness, to retire
approximately $2.7 million of the outstanding principal
owed on the senior secured convertible notes (with the remaining principal
balance of the senior secured notes to be converted to common stock at
closing) and for general corporate purposes. This is the first
time that Moody's has rated the debt of WLB.
..Issuer: Westmoreland Coal Company
....Corporate Family Rating, Assigned
....Probability of Default Rating, Assigned
....Speculative Grade Liquidity Rating,
....Senior secured Regular Bond/Debenture,
Assigned Caa2 (LGD4, 69%)
Moody's Caa1 CFR reflects WLB's aggressive amount of debt pro forma
for the proposed financing, significant heritage health benefit
costs, and concentrated operations in the Northern Powder River
Basin (PRB) coal region. The company has a high degree of customer
concentration, its mines generally have a short reserve life,
and WLB is seeking to expand its coal reserves, which could add
financial risk. Operating risk inherent in the coal mining industry
and the company's history of large operating losses, violation of
debt covenants and going concern issues have also been reflected in the
Moody's Caa2 rating for the senior secured notes reflects,
in addition to the aforementioned concerns, their structural subordination
to debt at Westmoreland Mining LLC (WML) or future subsidiaries that are
not, or will not be, guarantors of the notes, as well
as their effective subordination to WLB's asset-based credit
facility (ABL), which has a first-priority security interest
in accounts receivable, inventory, deposit accounts,
and cash and cash equivalents. WML owns the Rosebud, Jewett,
Beulah and Savage mines and its assets generate the majority of WLB's
consolidated revenues and cash flow, but WML's debt agreements
place restrictions on dividends that can be paid to WLB. In our
opinion, these dividends are important to ensuring that WLB has
adequate cash for servicing the debt at WLB given the narrow operating
base of WLB's guarantor subsidiaries, which include Westmoreland
Resources Inc. (the Absaloka mine) and the power facility at Westmoreland
Energy LLC (ROVA). However, in the event all of the outstanding
obligations under the WML notes are repaid in full or refinanced,
WLB shall be required to cause WML and its subsidiaries to become guarantors
of the new notes and grant a lien in all of the WML collateral.
The Caa1 CFR is supported by 425 million tons of coal reserves,
WLB's cost-plus long-term contracts, and adequate
liquidity over the next 12 months.
The company has a history of recurring operating losses, debt covenant
violations, and going concern issues. However, the
SGL-3 speculative grade liquidity rating reflects Moody's belief
that WLB will maintain an adequate liquidity profile over the next 12
months. The company plans to enter into a new asset-based
revolving credit facility, maturing in 2014. The facility
size will be approximately $20 million but availability will be
less, roughly $15 million after utilization for letters of
credit. Cash on hand of approximately $48 million should
be sufficient to cover all cash requirements given the expectation of
modest free cash flow during this period. At the same time,
Moody's believes compliance will be tight under WML's financial covenants
over the rating horizon, increasing the risk of a default under
the rated notes at WLB.
The stable outlook is supported by the company's contracted coal position.
U.S. coal producers saw business conditions revive in 2010,
but we expect relatively flat spot prices and subdued demand in 2011.
Significant drawdowns have reduced peak inventories of 2009, but
U.S. thermal coal stocks are still high and expected to
remain above historical averages in 2011. However, the ratings
could be revised upward if WLB is able to demonstrate that it can consistently
generate positive free cash flow to debt of 1%-3%.
The ratings could come under pressure if the company experiences a sustained
period of lower coal prices and/or higher operating costs during periods
of high capital spending or if there is a significant production shortfall
from targeted levels. The ratings also could be lowered from higher
than expected capital expenditures, aggressive debt-financed
acquisitions, impairment of liquidity arrangements, or unanticipated
The principal methodologies used in this rating were Global Mining Industry
published in May 2009, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
Based in Colorado Springs, CO, WLB is an energy company whose
operations include five surface coal mines in Montana, North Dakota
and Texas and two coal-fired power generating units with a total
capacity of 230 megawatts in North Carolina.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
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independent third-party sources. However, Moody's
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validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
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Please see the ratings disclosure page on our website www.moodys.com
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Caa2 to Westmoreland's new notes; outlook stable
250 Greenwich Street
New York, NY 10007
No Related Data.
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