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Global Credit Research - 01 Feb 2011
Approximately $2.7 billion of debt affected
New York, February 01, 2011 -- Moody's Investors Service assigned a (P)B1 rating to Walter Energy,
Inc.'s ("Walter") proposed $2.7
billion senior secured first lien credit facility comprised of a $375
million revolving credit facility due 2016, $600 million
term loan A due 2016, and a $1,750 million term loan
B due 2018. Moody's also confirmed the company's existing
B1 Corporate Family Rating ("CFR") and B2 Probability of Default
Rating. This action concludes the review initiated following Walter's
announcement on December 3, 2010 that it intended to acquire Western
Coal Corporation ("Western") for $3.3 billion.
The rating outlook is positive in recognition of the strong operating
prospects of the post-acquisition business.
Moody's confirmed the CFR and revised the rating outlook to positive
to reflect our view that the acquisition of Western would significantly
improve Walter's business profile by increasing scale, operating
diversity, geographic diversity, and providing access to new
export markets for metallurgical coal. Moody's estimates
the acquisition would immediately double Walter's coal production
to the 15-16 million ton range, and considering expansion
plans at both entities, total production could exceed 20 million
tons over the next two to three years. Acquired mining sites in
Western Canada and Central Appalachia would add geographic diversity beyond
Walter's current concentrated position in Southern Appalachia.
Pro forma for the combination, metallurgical coal would continue
to account for the majority of earnings and cash flow. As such,
the positive outlook reflects a diversified metallurgical coal operation,
substantial free cash flow generation, and strong credit metrics
for the rating category. The rating is constrained presently by
high absolute debt levels, execution risk associated with expansion
projects in Western Canada and Southern Appalachia, and Moody's
view that there is some likelihood of margin compression over the intermediate
Walter maintains and is expected to have on a pro forma basis very good
liquidity to support its operations over the near-term.
Walter had $218 million of balance sheet cash at 9/30/10.
We estimate a pro forma cash balance of approximately $75-100
million (after considering the acquisition and refinancing transaction).
Moody's also expects at least $400 million free cash flow over
the 12 months. We do not expect the company to draw on its $375
million revolving credit facility, though availability could be
reduced to below $300 million due to outstanding letters of credit.
The credit facility is expected to contain two financial maintenance covenants:
a maximum leverage ratio test and a minimum interest coverage ratio test.
The leverage ratio test is expected to be set at 3.50x and step
down to 3.25x in 1Q12. The interest coverage ratio test
is expected to be set at 3.00x with no step-ups over the
next 12 months. We expect substantial headroom under both covenants
over the next twelve months.
The positive rating outlook incorporates our expectation that robust market
conditions for metallurgical coal should enable Walter pro forma for the
acquisition to continue to generate substantial free cash flow over the
next 12-18 months, and our expectation that a large portion
of that free cash flow will be used for debt repayment. The CFR
could be upgraded in 2011 if Walter meets and/or exceeds its production
targets, maintains good profitability and liquidity, and repays
a meaningful amount of debt, and if the outlook for met coal continues
to be favorable. Conversely, the outlook could be stabilized
if Walter falls short of production targets and does not begin to reduce
meaningfully debt incurred to finance the acquisition of Western.
The following summarizes Moody's rating actions:
Walter Energy, Inc.
..$375 million proposed revolver due 2016 --
P(B1), LGD3, 31%
..$600 million proposed term loan A due 2016 --
P(B1), LGD3, 31%
..$1.75 billion proposed term loan B due 2018
-- P(B1), LGD3, 31%
..Corporate family rating -- at B1
..Probability of default rating -- at B2
Ratings confirmed (but to be withdrawn upon transaction completion):
..$300 million senior secured revolver, Ba3
(LGD 2; 26%)
..$136 million term loan, Ba3 (LGD 2;
Rating Outlook: Positive.
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.
Walter Energy, Inc., headquartered in Tampa,
Florida, is primarily a metallurgical coal producer which also produces
metallurgical coke, steam and industrial coal, and natural
gas. The company is currently in the process of acquiring British
Columbia based Western Coal Corporation. Pro-forma for the
Western acquisition, Walter's revenues were $2.1
billion for LTM period ended September 30, 2010.
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 maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
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
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Corporate Finance Group
Moody's Investors Service
Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns (P)B1 to Walter's proposed secured credit facility; Outlook is Positive
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