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Rating Action:

Moody's downgrades Contura Energy's CFR to Caa1; outlook stable

13 Apr 2020

New York, April 13, 2020 -- Moody's Investors Service, ("Moody's") downgraded all long-term ratings for Contura Energy, Inc., ("Contura") including the Corporate Family Rating ("CFR") to Caa1 from B3 and the senior secured term loan rating to Caa2 from Caa1. The rating outlook is stable.

"Contura has idled the majority of its mines due to weak market conditions. Moody's expects that demand for metallurgical coal will weaken further in the near-term as blast furnace steel producers adjust to reduced demand due to the Coronavirus," said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for Contura Energy, Inc. "The rating action is entirely driven by macro-level concerns resulting from the global outbreak of Coronavirus."

Downgrades:

..Issuer: Contura Energy, Inc.

.... Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

.... Corporate Family Rating, Downgraded to Caa1 from B3

....Senior Secured Bank Credit Facility, Downgraded to Caa2 (LGD4) from Caa1 (LGD4)

Outlook Actions:

..Issuer: Contura Energy, Inc.

....Outlook, Changed to Stable from Negative

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The coal sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Contura's exposure to the breadth and severity of the shock.

Moody's expects a very challenging year for the coal industry in 2020 -- including meaningful reduction in industry-wide demand for metallurgical coal and thermal coal in the next few months driven by an unprecedented shock to the economy due to the coronavirus outbreaks. Moody's expects that demand for steel will fall, causing steel producers to idle blast furnaces and reduce consumption of met coal, and demand for electricity will also fall, causing coal-fired power plants to delay and/or reduce volumes for thermal coal even though much of the industry's anticipated sales volume for 2020 is contracted today. In response to weakened market conditions, Contura has taken aggressive actions to curtail operations and preserve liquidity. Management had made operational improvements to reduce cash costs before the outbreak of coronavirus and took further actions in recent weeks such as idling most mining operations for up to 30 days. Contura's inventory position could create opportunities in an environment where competitors with less financial strength will struggle more significantly. However, Moody's expects that EBITDA (management-adjusted) will fall in 2020.

Moody's also believes that investor concerns related to the coal industry's ESG profile are intensifying and limit the industry's ability to respond to market disruptions in the near term. Access to capital is expected to narrow further in the early 2020s. 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, which together will 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 -- including reducing net debt in the near-to-medium term. Contura reported about $600 million of debt and $344 million of surety bonds to support reclamation-related items at 31 December 2019.

The Caa1 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, and adequate 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.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects the expectation for cash consumption balananced by meaningful liquidity. Moody's could downgrade the rating with expectations for substantive deterioration of liquidity or an inability to restart a majority of mining operations over the next few months. Moody's could upgrade the rating with expectations for adjusted financial leverage to remain below 4.0x (Debt/EBITDA), free cash flow in excess of $25 million, and adequate liquidity to support operations.

The SGL-3 balances more than $300 million of available liquidity with expectations for cash consumption in 2020 and meaningful sensitivity to changes in metallurgical coal prices. Moody's expects that actions taken by management combined with the ability to sell existing inventories will help preserve liquidity in the near term. On 23 March 2020, Contura Energy drew $57.5 million from the $225 million asset-based revolving credit facility. The revolver is used for letters of credit ($100 million at 31 December 2019) and some collateral limitations due to the asset-based nature of the facility. The revolver has a springing fixed charge coverage ratio test, which Moody's does not expect will be triggered in 2020, and the term loan does not have financial maintenance covenants.

Environmental, social, and governance considerations are important factors influencing Contura'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. Contura Energy is exposed to both thermal coal and metallurgical coal, though the company's thermal coal business does not generate meaningful earnings and cash flows. Moody's believes that thermal coal carries greater ESG-related risks than metallurgical coal. Governance-related risks are higher than average for publicly-traded mining companies, incorporating an aggressive approach to shareholder returns, has included more than $30 million of share repurchases in the third quarter of 2019 and a recent change in the company's chief executive officer in 2019.

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. The company also has 65% stake in the Dominion Terminal Associates coal export terminal in eastern Virginia. Contura generated $2.3 billion of revenue for the fiscal year ending December 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 debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

At least one ESG consideration was material to the credit rating outcome announced and described above.

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 office that issued the credit rating is available on www.moodys.com.

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.
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