Approximately $400 million debt securities affected
New York, March 23, 2011 -- Moody's Investors Service upgraded James River Coal Company's ("JRCC")
Corporate Family Rating ("CFR") to B3 from Caa2, and the rating
on the existing $150 million senior notes due 2012 to B2 from Caa1.
Moody's also assigned a B2 rating to the proposed $250 million
senior unsecured notes due 2019. The company intends to use the
net proceeds from this offering, and from the proposed offerings
of the new $125 million convertible notes and six million shares
of its common stock, to fund acquisition of International Resource
Partners ("IRP") for $475 million. These rating
actions conclude the review that commenced after JRCC signed a definitive
agreement to acquire IRP. The rating outlook is stable.
The ratings on the existing 9.375% senior notes due 2012
would be withdrawn and the LGD point estimates for the remaining rated
debt could change if the company successfully completes the recently announced
tender offer for the existing senior notes. Moody's understands
that JRCC expects a successful tender offer and is anticipated to upsize
all securities offerings currently contemplated, including common
equity, to account for the additional funding need of roughly $150-155
The rating upgrades reflect post-acquisition potential for significant
increase in JRCC's metallurgical coal production, increase
in operational diversity within Central Appalachia, and greater
access to export markets. On a pro forma basis, JRCC's
asset base would rise to 36 mines (including 23 underground, 13
surface, and 4 high wall miner mines) across 8 mining complexes.
Moody's estimates production could immediately increase by 2 million tons
(from 8.8 million tons in 2010), including over 1.2
million tons of high-vol metallurgical coal. Moody's believes
the metallurgical tons could create significant margin opportunity over
the intermediate term given our currently favorable view of the market.
The B3 CFR also reflects JRCC's favorable and highly contracted
position and prospects for strong cash flow from operations (before capital
spending) in 2011, increase in reserve position in metallurgical
coal, and expectations for robust cash balances and continued good
operating performance. These aspects offset the CFR despite higher
leverage and increase in debt on a pro forma basis.
The CFR is principally constrained by a high cost position and prospects
for margin compression in thermal coal business as existing contracts
roll off over the next two years. The ratings also consider relatively
high thermal coal inventories and generally stagnant coal demand at the
power utilities. Even after the IRP acquisition, we expect
JRCC to continue to operate small thin-seam coal mines in Central
Appalachia that are subject to significant operating and geological risk.
We believe these risks, in addition to heightened regulatory scrutiny
in the region, are likely to result in continued cost increases
over the intermediate term.
The Speculative Grade Liquidity rating was changed to SGL-3 from
SGL-2 primarily due to impending maturity of the existing $65
million asset-based revolving credit facility in February 2012.
However, we expect the liquidity position to remain adequate over
the next year as JRCC is expected to maintain sizeable cash balance (over
$175 million) and generate modestly positive free cash flow in
2011. The company has stated its intention to put in place a new
senior secured revolving credit facility at the completion of the IRP
The stable fundamental rating outlook assumes that JRCC would continue
to generate reasonable cash margins, address upcoming debt maturities,
maintain good balance sheet cash, make progress in gaining thermal
coal commitments for 2012 and beyond that adequately cover cash costs,
and meet its production targets pro forma for the acquisition.
Upward momentum is currently limited by high unit costs and upcoming debt
maturities. However, Moody's could consider a positive
action if JRCC reduces unit costs, maintains a good liquidity position,
and enters into favorable and highly contracted thermal coal positions
for ensuing two years . Positive ratings pressure could also develop
overtime if JRCC substantially meets and/or exceeds its mine development,
production and EBITDA targets, and if the outlook for met coal continues
to be favorable. Conversely, Moody's could consider
a negative action if JRCC experiences margin compression, there
is a substantive deterioration in the company's liquidity position,
there are substantial production delays, or leverage is expected
to stay above 5.5x on a sustained basis.
The following summarizes today's rating actions:
-Corporate Family Rating to B3 from Caa2
-Probability of Default Rating to B3 from Caa2
-$150 million senior notes due 2012 to B2 ( LGD 3;
36%) from Caa1 ( LGD 3; 42%)*
-Proposed $250 million senior notes due 2019 at B2 ( LGD
* rating would be withdrawn if the tender offer is successful
** LGD point estimate could change if the tender offer is successful
and convertible notes offering is upsized
Rating outlook is stable.
The ratings are subject to closing of the transaction and Moody's
review of final documentation.
The principal methodologies used in this rating were Global Mining Industry
published in May 2009, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
The last rating action was on May 27, 2010 when the corporate family
rating of James River Coal Company was raised to Caa2 from Caa3.
Headquartered in Richmond, Virginia, James River Coal Company
is engaged in the mining and marketing of steam and industrial coal.
The company currently operates six mining complexes in Central Appalachia
and the Illinois Basin. Revenues were approximately $701
million for 2010.
Information sources used to prepare the credit 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.
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on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
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is not an auditor and cannot in every instance independently verify or
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Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
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and accurate based on the information that is available to it.
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Corporate Finance Group
Moody's Investors Service
Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's raises James River Coal's CFR to B3; rates proposed senior notes B2
250 Greenwich Street
New York, NY 10007