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Rating Action:

Moody's upgrades Alpha Met's CFR to B3

14 Sep 2021

New York, September 14, 2021 -- Moody's Investors Service ("Moody's") upgraded Alpha Metallurgical Resources, Inc.'s Corporate Family Rating ("CFR") to B3 from Caa1 and senior secured term loan rating to B3 from Caa2. Moody's also upgraded the company's Speculative Grade Liquidity Rating ("SGL") to SGL-2 from SGL-3. The rating outlook is stable.

"Alpha's earnings and cash flow will strengthen significantly on higher metallurgical coal prices and reduced cash costs, improving liquidity and creating an opportunity for meaningful debt reduction," said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for Alpha Metallurgical Resources, Inc.

Upgrades:

..Issuer: Alpha Metallurgical Resources, Inc.

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

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

.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3

....Senior Secured First Lien Bank Credit Facility, Upgraded to B3 (LGD4) from Caa2 (LGD4)

Outlook Actions:

..Issuer: Alpha Metallurgical Resources, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

Moody's expects that robust metallurgical coal prices will translate into stronger earnings and cash flow in the second half of 2021 with continued strength in 2022. Management guided during the second quarter earnings call to coal shipments in the range of 15.6 -- 17.5 million tons (up from the previous range of 14.8 -- 16.2 million tons) with 14.3 -- 15.8 million tons of metallurgical coal. Alpha also indicated that about one-fifth of met coal was unpriced for 2021. As the company takes advantage of a strong market for unpriced tons in 2021 and signs new contracts for 2022, Moody's forecasted financial performance likely will be increased in the coming months with the potential for further upward rating momentum in response to reduction in debt and/or non-debt liabilities. While adjusted financial leverage is near 10x (Debt/EBITDA) for the twelve months ended 30 June 2021, Moody's expects that adjusted financial leverage will fall below 4.0x in the coming quarters and the company will have an opportunity to reduce debt meaningfully.

However, Moody's believes that investor concerns about the coal industry's ESG profile are still intensifying and coal producers will be increasingly challenged by access to capital issues in the early-to-mid 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. A clear shift toward metallurgical coal, compared to a legacy position more focused on thermal coal, is an emerging positive factor from an ESG standpoint. 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, especially if investors do not differentiate meaningfully between thermal and met coal, 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. Alpha reported about $580 million of debt and $212 million of surety bonds to support reclamation-related items at 30 June 2021.

The B3 CFR is principally constrained by the inherent volatility in the metallurgical coal industry that makes 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 in the United States, inherent geological and operational risks associated with mining, and heightened environmental and social risks associated with the coal industry -- including meaningful legacy liabilities, including some mining-specific items, such asset retirement obligations related to the impact of coal mining on the environment, coal-specific items, such as black lung liabilities related to negative health impacts on mining employees, and adverse policy risks in the context of national decarbonization objectives. Additionally, Alpha's cost structure is higher than some other US metallurgical coal mines, which resulted in negative free cash flow during the most recent industry downcycle. The rating benefits from moderate operating diversity, meaningful coal reserves, access to multiple transportation options, and good liquidity. The rating recognizes the potential for very strong earnings, cash flow generation, and credit metrics when met coal prices above mid-cycle levels. Substantive reduction in debt, combined with continued progress on reducing cash costs, creates the potential for much better resilience in future commodity and/or economic downturns. Alpha experienced substantial earnings compression and erosion of liquidity following the global outbreak of Coronavirus in early 2020.

The SGL-2 reflects good liquidity to support operations over the next 12-18 months, including expectations for positive free cash flow and more than $130 million of available liquidity at 30 June 2021. Available liquidity is comprised of $72 million of balance sheet cash and $60 million availability under a $225 million asset-based revolving credit facility. The ABL is governed by a borrowing base and, while no cash borrowings were outstanding, nearly $130 million of letters of credit were posted against the facility. The revolver has a springing fixed charge coverage ratio test and the term loan does not have financial maintenance covenants, but the revolver matures in April 2022. The SGL does not consider revolvers with near-term maturities as a source of liquidity in the SGL-specific analysis. However, Alpha also disclosed in August 2021 the receipt of a $70 million tax refund payment.

The B3 rating on the first lien senior secured term loan reflects its effective subordination to the asset-based revolving credit facility, which we believe has higher quality (more liquid) collateral, as well as our expectation that recovery on secured debt in the event of a bankruptcy could be negatively impacted by unprofitable mines, legacy liabilities, and environmental obligations.

Environmental, social, and governance considerations are important factors influencing Alpha'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. Alpha is exposed primarily to metallurgical coal, though the company's does produce a small amount of coal sold into thermal coal markets. 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 and use of debt in the past few years, but new management has made more conservative statements with respect to financial policies.

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

The stable outlook reflects the expectation for positive free cash flow generation through 2022. Moody's could downgrade the rating with expectations for substantive deterioration of liquidity, including negative free cash flow, or an expected increase in financial leverage above 4.0x (Debt/EBITDA). Moody's could upgrade the rating with expectations for adjusted financial leverage to remain below 3.0x (Debt/EBITDA), free cash flow sustained in excess of $50 million, and a commitment to meaningful debt reduction in advance of upcoming debt maturities.

Headquartered in Tennessee, USA, Alpha operates 19 metallurgical coal mines and 8 coal preparation plants. The company also owns 65% of Dominion Terminal Associates coal port in Newport News, Virginia. Alpha's met coal production mix is comprised of Low-Vol, Mid-Vol, High Vol A, and High Vol B coals. The company also produces byproduct coal sold into thermal markets. Alpha generated $1.4 billion of revenue for the twelve months ended 30 June 2021.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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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