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Rating Action:

Moody's downgrades Arch Coal's corporate family and unsecured debt ratings to B1 and B2 respectively, and assigns Ba2 rating to Arch's new secured term loan; outlook negative.

Global Credit Research - 02 May 2012

Approximately $4.1 billion of rated debt affected

New York, May 02, 2012 -- Moody's today downgraded Arch Coal Inc's (Arch) corporate family rating (CFR) and probability of default rating to B1 from Ba3. At the same time, Moody's downgraded the ratings on the company's senior unsecured debt to B2 from B1, and assigned a Ba2 rating to Arch's amended credit facility, which will include $1 billion secured term loan and $1 billion secured revolver. Moody's also assigned a speculative grade liquidity (SGL) rating of SGL-3. The outlook is negative.

Moody's took the following rating actions:

Downgrades:

..Issuer: Arch Coal, Inc.

.... Probability of Default Rating, Downgraded to B1 from Ba3

.... Corporate Family Rating, Downgraded to B1 from Ba3

....Senior Unsecured Regular Bond/Debenture, Downgraded to B2, LGD4, 69 % from B1, LGD4, 65 %

Assignments:

..Issuer: Arch Coal, Inc.

.... Speculative Grade Liquidity Rating, Assigned SGL-3

....Senior Secured Bank Credit Facility, Assigned Ba2, 21 - LGD2

Outlook Actions:

..Issuer: Arch Coal, Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

The downgrade reflects our expectation that Arch's credit metrics will contract and liquidity will deteriorate in 2012, due to challenges facing the company's thermal coal business and the softness in the metallurgical coal market. We expect that sales volume from Arch's Powder River Basin (PRB) business will decline by 10-15% as compared to 2011, while the margins will contract in the Appalachian business on lower metallurgical coal prices and higher costs, even as the mix of sales shifts in favor of met from thermal. We expect that Arch's Debt/EBITDA, as adjusted, will be in excess of 7x in 2012. We also believe that credit metrics will remain weak in 2013, as delivered prices for thermal coal may contract due to lower spot prices in 2012, even though Arch's substantial contracted position for 2013 at favorable prices will mitigate this impact. We expect that volumes of delivered coal will rebound in 2013 but are unlikely to return to pre-2012 levels. The extent of rebound in volumes will depend, in part, on weather and natural gas prices. We expect that metallurgical coal prices will rebound through the end of 2012 and beyond; however, metallurgical coal prices are volatile, affecting stability and predictability of margins of the company's Appalachian business.

The SGL-3 liquidity rating reflects our expectation that over the next twelve to eighteen months, Arch will have sufficient liquidity, but that the liquidity position will deteriorate. As of March 31, 2011, Arch had $117 million in cash and approximately $1.6 billion available under its $2 billion revolver. Subsequent to the proposed credit facility amendment, the full amount under the revised $1 billion revolver will be available. The proceeds from $1 billion term loan will be used to retire existing revolver borrowings, to repay $450 million senior unsecured notes of Arch Western Finance, and to increase cash balance. The amendments to the secured credit facility will include covenant relief, and we expect Arch to be in compliance with the revised covenants, even though available headroom will be limited. We expect that outstanding revolver borrowings will increase through 2013, to accommodate negative free cash flows over that horizon.

The secured debt rating of Ba2 and senior unsecured debt rating of B2, relative to the B1 CFR, reflect their position in the capital structure and priority of claims in the event of default. The new secured credit facilities will be secured by substantially all assets of the company and its subsidiaries.

The deterioration in Arch's financial performance is largely driven by the market conditions and challenges facing the US thermal coal industry. Unusually warm weather in the US and low natural gas prices in 2011-2012 led to a collapse in coal prices across most coal producing regions and production cuts across the industry, with utilities decreasing their coal-fired generation in favor of lower-priced gas. For the longer term, sustainable low natural gas prices, combined with environmental regulations disadvantaging coal, will slowly continue to erode coal's position as a raw material for electric generation.

Arch's B1 CFR reflects its 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 include high leverage, high capital expenditures, weakness in the US thermal coal markets, volatility of met coal prices, inflationary cost pressures, and the inherent geological and operating risk associated with mining. Furthermore, coal mine productivity and costs have been adversely impacted by stricter mine safety inspections and greater difficulty in permitting mines and refuse disposal sites due to heightened environmental concerns.

The negative outlook reflects our expectation that credit metrics will remain weak through 2013 while the domestic coal market will continue to face challenging conditions for the foreseeable future, with the extent of and timing of recovery uncertain. That said, the outlook could be stabilized if we expected Debt/EBITDA ratio, as adjusted, to trend towards 4.5x. A further downgrade would be considered if Debt/ EBITDA is expected to remain above 5.5x on a sustained basis after 2012, if quarterly earnings continue to erode, or if there are substantial concerns over the company's liquidity position or covenant compliance.

The principal methodology used in rating Arch Coal Inc was the Global Mining Industry Methodology 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.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare the 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 considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

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 downgrades Arch Coal's corporate family and unsecured debt ratings to B1 and B2 respectively, and assigns Ba2 rating to Arch's new secured term loan; outlook negative.
No Related Data.

 

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