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
