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
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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
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Please see www.moodys.com for any updates on changes to
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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
