New York, December 03, 2020 -- Moody's Investors Service ("Moody's") downgraded
Arch Resources, Inc.'s ("Arch") Corporate
Family Rating ("CFR") to B2 from B1 and senior secured ratings
to B2 from B1. The Speculative Grade Liquidity Rating is unchanged
at SGL-2. The rating outlook is stable.
"Arch remains committed to starting production at Leer South in
the third quarter of 2021. Given recent weakness in global metallurgical
coal pricing and significant competitive issues in the Powder River Basin
thermal coal production region, Moody's expects that the company
will have higher net debt balances when the project is completed,"
said Ben Nelson, Moody's Vice President -- Senior Credit Officer
and lead analyst for Arch Resources, Inc.
Downgrades:
..Issuer: Arch Resources, Inc.
.... Corporate Family Rating, Downgraded
to B2 from B1
.... Probability of Default Rating,
Downgraded to B2-PD from B1-PD
....Senior Secured Bank Credit Facility,
Downgraded to B2 (LGD4) from B1 (LGD4)
..Issuer: WEST VIRGINIA ECONOMIC DEVELOPMENT AUTHORITY
....Senior Secured Revenue Bonds, Downgraded
to B2 (LGD4) from B1 (LGD4)
Outlook Actions:
..Issuer: Arch Resources, Inc.
....Outlook, Changed To Stable From
Negative
RATINGS RATIONALE
Moody's expects a challenging conditions for the coal industry will
extend into 2021 following a very difficult 2020 driven by the global
outbreaks of Coronavirus. Domestic demand for thermal coal,
particularly in the Power River Basin region, is constrained by
falling demand for coal for power generation and high inventory levels.
Moody's believes this region will remain oversupplied in 2021.
Domestic and international demand for metallurgical coal is recovering
heading into 2021 but pricing remans weak and recent disruption in the
seaborne market is compounding the situation.
Moody's downgraded Arch's rating to reflect substantive weakening
in credit metrics and low likelihood of meaningful improvement in the
first half of 2021. Moody's expects that the company's EBITDA will
fall below $50 million in 2020 and, based on export metallurgical
coal pricing moving toward the midpoint of Moody's range of $100-160
per metric ton (CFR Jingtang), improve into the range of $125-175
million in 2021. Moody's expects that the company will burn
cash and adjusted financial leverage will increase above 10 times (Debt/EBITDA)
by the end of 2020. Capital spending for the Leer South project
will remain elevated over the next few quarters and result in a meaningful
increase in net debt from substantially no net debt at the end of 2019
to more than $400 million by the third quarter of 2021.
Moody's 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, especially in North America.
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, will together
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.
The B2 CFR reflects a diverse platform of eight coal mining assets in
the United States capable of strong cash flow generation. The company's
approach to maintaining low debt levels and a significant liquidity cushion
helped the company withstand difficult industry conditions despite severe
earnings compression. Operational risk is a constraint, with
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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The SGL-2 reflects our expectation for good liquidity to support
operations over the next 12-18 months. Moody's expects that
the company will burn cash in 2020 due to heavy expansionary capital spending
on the Leer South mine project. 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. Arch's recent issuance of convertible notes
helped bolster available liquidity to about $400 million.
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. Through capital investment in the Leer South project,
Arch Resources 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.
Arch Resources sold its last thermal coal mine in Appalachia in December
2019 -- a surface mine called Coal-Mac --
and has signaled an intention to reduce emphasis on thermal coal mining
in other regions. Governance-related risks are representative
of a publicly traded coal company with an ongoing emphasis on maintaining
balance sheet cash and good liquidity. However, Arch returned
more than $900 million of cash to shareholders since 2017 and the
decision to increase debt levels to complete the Leer South project is
deemed as financially aggressive. Arch also reported $529
million of reclamation-related surety bonds and $114 million
of surety bonds for other obligations.
The stable outlook balances expectations for continued earnings compression
and weak credit metrics with the company's substantial liquidity
position. Moody's could downgrade the rating with further weakness
or lack of recovery in metallurgical coal pricing, expectations
for available liquidity to fall below $175 million, or any
meaningful operational issues at the company's Black Thunder or Leer mines.
Moody's could upgrade the rating with expectations for free cash flow
generation above $100 million, meaningful debt reduction,
and financial policies consistent that support maintaining a low net debt
position in the medium-to-long term.
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 $2.3 billion
of revenue in 2019.
The principal methodology used in these ratings was Mining published in
September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, 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
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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
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JOURNALISTS: 1 212 553 0376
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