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Rating Action:

Moody's rates Walter Energy's proposed secured notes at B3

Global Credit Research - 19 Sep 2013

$350 million of new debt rated

New York, September 19, 2013 -- Moody's Investors Service assigned a B3 rating to Walter Energy Inc.'s proposed senior secured notes due 2019. Proceeds from the proposed offering are expected to retire a portion of the company's existing senior secured bank debt and add cash to the balance sheet to improve liquidity. Moody's also affirmed the Caa1 Corporate Family Rating ("CFR"), Caa2 senior unsecured ratings, and lowered the existing senior secured ratings to B3 from B2 to reflect the increased level of secured debt in the capital structure. Moody's intends to upgrade the short-term liquidity rating to SGL-3 from SGL-4 following the completion of the transaction. The rating outlook is stable.

Today's actions:

..Issuer: Walter Energy, Inc.

....Corporate Family Rating, Affirmed Caa1

....Probability of Default Rating, Affirmed Caa1-PD

....$375 million Senior Secured Revolving Credit Facility due 2016, Downgraded to B3 (LGD3 35%) from B2 (LGD3 31%)

....$657 million Senior Secured Term Loan A due 2016, Downgraded to B3 (LGD3 35%) from B2 (LGD3 31%)

....$979 million Senior Secured Term Loan B due 2018, Downgraded to B3 (LGD3 35%) from B2 (LGD3 31%)

....$350 million Senior Secured Notes due 2019, Assigned B3 (LGD3 35%)

....$500 million Senior Unsecured Notes due 2020, Affirmed Caa2 (LGD5 79%)

....$450 million Senior Unsecured Notes due 2021, Affirmed Caa2 (LGD5 79%)

..Outlook, Stable

Moody's expects the metallurgical coal industry will remain weak in the near-term, but recent production cuts have led to modest tightening in the supply/demand balance of the industry and should support fourth quarter benchmark pricing at or modestly above the $145/ton level set for third quarter deliveries. The net impact of recently-announced production cuts on the global market remains quite modest at this point and unlikely to support sustained meaningful price increases without a fundamental improvement in demand from the steel industry. Domestic met coal producers reliant on exports remain disadvantaged in the global seaborne market and remain particularly vulnerable to cash burn in what Moody's expects will continue to be a low price environment.

Upon closing in accordance with the terms and conditions as described, Moody's intends to upgrade the short-term liquidity rating SGL-3 from SGL-4 to reflect an improved cash position and debt maturity profile. The SGL-3 would also acknowledge reduced downside price risk owing to the modest improvement in market conditions for metallurgical coal. Moody's expects Walter will generate EBITDA in the $125-175 million range in 2013 with year-over-year improvement starting in the fourth quarter of 2013. Free cash flow is likely to remain negative in the near-term, especially considering the decision to continue to operate the Brule mine in western Canada because that will limit the company's ability to reduce inventories in that region, but an effective liquidity cushion of over $430 million provides sufficient cushion to cover expected cash burn in the near-term. Moody's measures effective liquidity as existing balance sheet cash of $171 million, plus added cash from the proposed transaction, plus revolver availability of about $315 million after considering letters of credit, less the $225 minimum liquidity requirement. Moody's anticipates a modest cushion of compliance the net senior secured leverage covenant upon resumption of testing in the second quarter of 2014. Continued compliance through the end of 2014 likely will require additional improvement in met coal prices.

RATINGS RATIONALE

The Caa1 CFR reflects the difficulties of operating a commodity-driven business in a protracted trough cycle environment with a highly-leveraged balance sheet and a modest effective liquidity cushion. The rating is also constrained by high operating risk implied by high reliance on a few key coal mines for the majority of earnings and cash flow, and limited trough-cycle margin potential of the metallurgical coal assets in western Canada. Success in implementing cost control programs, strong potential earnings and cash flow on a mid-cycle basis, and the value of the very cost competitive metallurgical coal assets in Alabama support the rating.

The rating acknowledges a high level of capital structure activity in recent quarters and anticipates that management will continue to pursue transactions to bolster liquidity in the short-term, if necessary. The company started relaxing covenants with an amendment in August 2012, relaxed covenants and repaid secured debt through a concurrent amendment and unsecured issuance in November 2012, repaid additional secured debt and parked cash on the balance sheet with the proceeds of another unsecured issuance in March 2013, pulled a refinancing transaction in June 2013, relaxed covenants significantly through an amendment in July 2013, and has returned with the secured issuance to repay debt and park more cash on the balance sheet through the proposed transaction. Management has also made public statements about pursuing asset sales and has capacity in its credit agreements to raise additional debt for liquidity purposes. These activities could drive volatility in instrument-level ratings.

The stable outlook anticipates that modest improvement in met coal fundamentals will drive modest quarterly improvement in operating results and that the company will maintain adequate liquidity to support operations. Moody's could upgrade the rating with evidence that recent positive momentum in spot met coal pricing will translate into positive free cash flow on a sustained basis and a demonstrated willingness to start to reduce debt. Moody's could downgrade the rating with further deterioration in market conditions or pricing, expectations for substantive erosion in the company's cash position, or heightened concerns related to upcoming loan amortization in 2015.

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.

Walter Energy, Inc., is primarily a metallurgical coal producer with additional operations in metallurgical coke, steam and industrial coal, and natural gas. Headquartered in Birmingham, Alabama, the company generated $2 billion in revenue for the twelve months ended June 30, 2013.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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
Asst Vice President - 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 rates Walter Energy's proposed secured notes at B3
No Related Data.

 

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