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Rating Action:

Moody's downgrades James River Coal to Caa2; outlook negative

Global Credit Research - 22 May 2013

New York, May 22, 2013 -- Moody's Investors Service downgraded James River Coal Company's Corporate Family Rating ("CFR") to Caa2 from Caa1 and the company's Senior Unsecured Notes due 2019 to Caa2 from B3. Moody's also affirmed the SGL-3 Speculative Grade Liquidity Rating. The rating outlook is negative.

"While the company continues to take actions to reposition operations and shore up its balance sheet, we expect external factors will preclude James River from maintaining credit measures and liquidity consistent with the Caa1 rating level," said Ben Nelson, Moody's lead analyst for James River Coal Company.

Today's actions:

..Issuer: James River Coal Company

.Corporate Family Rating, Downgraded to Caa2 from Caa1

.Probability of Default Rating, Downgraded to Caa2-PD from Caa1-PD, /LD

.Senior Unsecured Notes due 2019, Downgraded to Caa2 (LGD4 54%) from B3 (LGD3 39%)

.Speculative Grade Liquidity Rating, Affirmed SGL-3

..Outlook, Negative

The one-notch downgrade to a Caa2 CFR is based on expectations that adjusted financial leverage will remain above 10 times Debt/EBITDA and liquidity will contract to below the $75 million necessary to maintain the Caa1 CFR. While James River reduced cash costs during the first quarter by shutting in about 3 million tons of high-cost production in Central Appalachia and cut capital spending significantly, Moody's believes that the company is likely to continue burning cash absent additional cost reductions of at least $5/ton or a substantive improvement in thermal coal markets.

Moody's expects the company's effective liquidity cushion, by our calculation, to fall below $75 million in the near-term. James River reported in the first quarter available liquidity of about $118 million comprised of $98 million of balance sheet cash and $20 million of revolver availability after considering borrowing base restrictions and letters of credit. However, the revolver has a springing fixed charge coverage ratio test if available liquidity falls below $35 million. Because Moody's does not expect the company will be able to pass this test if triggered, we deduct $35 million from our calculation of the company's current effective liquidity cushion and view it as closer to $83 million.

The two-notch downgrade on the unsecured notes reflects the one-notch reduction in the CFR, as well as an additional notch due to changes in the capital structure per the terms of the privately-negotiated exchanged agreements announced in an 8K filed on May 17, 2013. James River retired $90 million of 4.50% Convertible Senior Notes due 2015 and $153 million of 3.125% Convertible Senior Notes due 2017 for $123 million of new 10% Convertible Senior Notes due 2018. While existing convertible notes do not benefit from operating subsidiary guarantees and rank below the 7.875% Senior Unsecured Notes due 2019 per Moody's Loss Given Default Methodology, the new notes will pick up operating subsidiary guarantees and rank pari passu with the rated notes.

In addition, the debt exchange transaction qualifies as a limited default under Moody's definition of default. Moody's definition of default is intended to capture events whereby issuers fail to meet debt service obligations outlined in original debt agreements. The debt restructuring does not constitute an event of default under any of the company's existing debt agreements, which have been amended to allow for the restructuring of the convertible notes. Moody's continues to expect the company to pursue options to restructure its balance sheet.

RATINGS RATIONALE

The Caa2 CFR is principally constrained by weak credit protection measures, uncertainty related to the company's ability to achieve breakeven cash flows in the current market environment, and prospects for additional capital structure changes in the near-term. The rating also reflects a high cost position, significant exposure to the most challenged coal basin, unfavorable impacts of increasingly stringent government regulations, and the inherent operating risk and capital intensity of mining. Some operational and product diversity, margin opportunity on thermal coal in the Illinois Basin and metallurgical coal in Central Appalachia, and adequate liquidity support the rating.

The SGL-3 Speculative Grade Liquidity Rating indicates adequate liquidity to support operations in the near-term. Moody's expects the company will generate negative free cash flow over the next several quarters and rely on its $98 million cash balance to fund shortfalls. James River also has an undrawn $100 million asset-based revolving credit facility, though only $20 million is available after considering borrowing base restrictions and letters of credit. Moody's also believes that in the near term the company is not likely to trigger the 1.1x fixed charge coverage ratio test that springs into effect if available liquidity falls below $35 million..

The negative outlook reflects Moody's view that without an improvement in market conditions the company could continue to burn significant cash in the near-term. Moody's could downgrade the rating in response to continued cash burn or worsening industry conditions. Stabilization of the rating outlook could occur if Moody's expects James River will be able to halt its ongoing cash burn. Moody's could upgrade the rating if a combination of improved market conditions, operational restructuring, and balance sheet restructuring evidences a more sustainable capital structure with leverage well below 10 times.

The principal methodology used in this rating was the Global Mining Industry 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

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 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 rating action, and whose ratings may change as a result of this 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.

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
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

Alexandra S. Parker
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 James River Coal to Caa2; outlook negative
No Related Data.
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