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Rating Action:

Moody's upgrades Alpha's CFR to B2; outlook positive

21 Jul 2022

New York, July 21, 2022 -- Moody's Investors Service ("Moody's") upgraded Alpha Metallurgical Resources, Inc.'s (Alpha) Corporate Family Rating ("CFR") to B2 from B3, upgraded the probability of default rating to B2-PD from B3-PD, assigned a B1 rating to the company's ABL facility, and withdrew the B3 rating on the Senior Secured Term Loan following full repayment. The company's Speculative Grade Liquidity Rating ("SGL") of SGL-2 is unchanged. The rating outlook is changed to positive from stable.

"Alpha prioritized and accelerated gross debt reduction using strong free cash flow that resulted from historically high met coal prices in the first half of 2022, which positions them well for a more normalized coal price environment in future years," said Sandeep Sama, Moody's Vice President – Senior Analyst and lead analyst for Alpha Metallurgical Resources, Inc.

Upgrades:

..Issuer: Alpha Metallurgical Resources, Inc.

.... Corporate Family Rating, Upgraded to B2 from B3

.... Probability of Default Rating, Upgraded to B2-PD from B3-PD

Assignments:

..Issuer: Alpha Metallurgical Resources, Inc.

....Senior Secured Asset-Based Revolving Credit Facility, Assigned B1 (LGD3)

Withdrawals:

..Issuer: Alpha Metallurgical Resources, Inc.

....Senior Secured Term Loan, Withdrawn , previously rated B3 (LGD4)

Outlook Actions:

..Issuer: Alpha Metallurgical Resources, Inc.

....Outlook, Changed to Positive from Stable

RATINGS RATIONALE

Moody's expects that strong metallurgical coal prices will allow Alpha to generate record earnings and cash flow in 2022, before likely moderating to more normalized levels next year. The current strong market environment also provides Alpha the opportunity to lock-in relatively attractive pricing for 2023 for some of their met coal output. Alpha prioritized excess cash flow for gross debt reduction, and fully repaid their Term Loan, bringing their unadjusted gross leverage close to zero, before turning to shareholder returns by reinstating the dividend and ramping up the share buyback program. That said, Alpha's relatively high cost structure vs. peers, which can squeeze margins in a lower commodity price environment, and a slower pace of anticipated decline in non-debt liabilities (pension obligations, workers' comp and black lung obligations, and asset retirement obligations), together with ESG headwinds, are constraints to a higher rating.

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. 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 a positive development for Alpha from an ESG standpoint. However, debt capital could become more expensive, 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 debt in the near-to-medium term. Alpha reported about $174 million of surety bonds to support reclamation-related items at 31 Mar 2022.

The B2 CFR is constrained by the inherent volatility in the metallurgical coal industry, and a relatively higher cost structure vs. met coal peers. 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, such as asset retirement obligations related to the impact of coal mining on the environment, black lung liabilities related to negative health impacts on mining employees, and adverse policy risks in the context of national decarbonization objectives. The rating benefits from moderate operating diversity, meaningful coal reserves, access to multiple transportation options, good liquidity, and limited balance sheet leverage following the recent reduction. The rating recognizes the potential for very strong earnings, cash flow generation, and credit metrics when met coal prices are above mid-cycle levels, like we are seeing currently. Continued progress on reducing cash costs, together with reduction of legacy liabilities 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 rating reflects good liquidity to support operations over the next 12-15 months, including expectations for significant positive free cash flow generation. As of 31 Mar 2022, Alpha had $193 million of available liquidity, comprised of $159 million of balance sheet cash and $34 million availability under a $155 million asset-based revolving credit facility. Subsequently in the second quarter, Alpha used cash flow from operations to fully repay the $550 million Term Loan and also received $57 million of collateral releases which reduces letters of credit posting requirements thereby improving ABL availability and overall liquidity. The ABL, which has a December 2024 maturity date, is governed by a borrowing base and has a springing fixed charge coverage ratio test.

The B1 rating on the company's senior secured asset-based revolving credit facility reflects the first lien on substantially all assets of the company and guarantees from all of Alpha's direct and indirect subsidiaries. The ABL facility also benefits from a higher rating relative to the CFR given its seniority in the capital structure as well as higher quality (more liquid) collateral.

Environmental, social, and governance considerations are important factors influencing Alpha's credit quality. Alpha's ESG Credit Impact Score is Very High (CIS-5). The score reflects very high Environmental risk (E-5), very high Social risk (S-5), and high Governance risk (G-4) – all of which are unchanged. Alpha's E-5 Environmental score is driven by very high carbon transition risk, the S-5 score is driven by very high health & safety risk, and the G-4 score is driven by high risk around financial policy. Given Alpha's decision to prioritize debt reduction with excess cash flow, we are revising our 'Financial Strategy & Risk Management' score under the Governance category to 4 from 5.

From an environmental perspective the coal mining sector is 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 byproduct 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 a publicly-traded mining company, incorporating an aggressive approach to shareholder returns and use of debt in the past few years, but current management has been more conservative with respect to financial policies, as evidenced by the recent debt reduction action.

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

The positive outlook reflects the potential for strong credit metrics in the near-to-medium term. Moody's could upgrade the rating if Alpha establishes a track record of operating the business will little to no gross leverage, maintains adequate liquidity and/or establishes a cash reserve to address their non-debt liabilities before allocating excess cash to shareholder returns, and takes actions to bring down cash costs in line with peers. However, we expect incremental rating upside to be limited to one notch, given the ESG headwinds faced by the coal sector.

Moody's could downgrade the rating with expectations for substantial deterioration of liquidity, including negative free cash flow, or with the pursuit of an aggressive shareholder returns policy which results in an increase in gross leverage above 3.0x.  

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 $2.9 billion of revenue for the twelve months ended 31 Mar 2022.

The principal methodology used in these ratings was Mining published in October 2021 and available at https://ratings.moodys.com/api/rmc-documents/76085. Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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 https://ratings.moodys.com/documents/PBC_1288235.

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 https://ratings.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 https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Sandeep Sama, CFA
Vice President - Senior Analyst
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

Karen Nickerson
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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