New York, November 16, 2022 -- Moody's Investors Service ("Moody's") upgraded Arch Resources, Inc.'s ("Arch") corporate family rating ("CFR") to B1 from B2, and the probability of default rating to B1-PD from B2-PD. The rating on its senior secured first lien term loan, and the rating on its senior secured revenue bonds for WEST VIRGINIA ECONOMIC DEVELOPMENT AUTHORITY have been affirmed at B2. The Speculative Grade Liquidity Rating ("SGL") of SGL-1 is unchanged. The rating outlook has been revised to stable from positive.
"The upgrade of Arch's CFR to B1 reflects significant gross debt reduction this year using free cash flow that resulted from a strong price environment for both thermal and metallurgical coal", said Sandeep Sama, Moody's Vice President – Senior Analyst and lead analyst for Arch Resources, Inc., adding "the affirmation of the instrument ratings at B2 reflects the priority and proportion of secured debt now ahead of the rated instruments in the debt capital structure."
Governance considerations under Moody's ESG framework – including financial strategy – were key drivers of the rating action.
Upgrades:
..Issuer: Arch Resources, Inc.
....Corporate Family Rating, Upgraded to B1 from B2
....Probability of Default Rating, Upgraded to B1-PD from B2-PD
Affirmations:
..Issuer: Arch Resources, Inc.
....Senior Secured First Lien Term Loan B, Affirmed B2 (LGD4)
..Issuer: WEST VIRGINIA ECONOMIC DEVELOPMENT AUTHORITY
....Senior Secured Revenue Bonds, Affirmed B2 (LGD4)
Outlook Actions:
..Issuer: Arch Resources, Inc.
....Outlook, Changed To Stable From Positive
RATINGS RATIONALE
Arch's B1 CFR reflects its diverse portfolio of seven coal mining assets in the US, with exposure to both metallurgical and thermal coal, low gross debt levels following significant debt paydown this year, strong cash flow generation potential of its portfolio, and the cash reserve established towards the reclamation costs for their thermal assets. The rating is constrained by concentration of earnings and cash flow around three mines – Black Thunder thermal coal mine in the PRB, the Leer mining complex in Northern Appalachia, and the new Leer South mining complex in Northern Appalachia. The rating also reflects the inherent volatility in met coal prices, as well as the ongoing secular decline in domestic demand for thermal coal.
Owing to the strong pricing environment for both thermal and metallurgical coal over the past 12 months, Arch generated a significant amount of free cash flow, and allocated a majority of it towards gross debt reduction. Arch was able to reduce unadjusted gross debt from $605 million at year-end 2021, to $178 million at September 30, 2022. Additionally, Arch has set aside $130 million towards the funding for long-term asset retirement obligation associated with its thermal assets.
Moody's believes that investor concerns about the coal industry's ESG profile are still intensifying and, notwithstanding current strength in coal pricing and better debt trading levels, coal producers will be increasingly challenged by access to capital issues in the 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 shift toward metallurgical coal, compared to a legacy position more focused on thermal coal, is an emerging positive factor from an ESG standpoint. Moody's expects that Arch will shift in this direction but maintain substantial thermal coal operations with a slow but steady scale down to occur in the coming years. 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 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.
The SGL-1 reflects our expectation for very good liquidity to support operations over the next 12-18 months. Moody's expects that the company will generate significant free cash flow in 2023. The primary source of liquidity beyond internally-generated free cash flow is the company's cash balance combined with modest availability under an accounts receivables securitization facility and an unrated inventory-based revolving credit facility.
The stable outlook reflects our expectation that business conditions will remain strong over the next 12-18 months, allowing Arch to continue to generate strong free cash flow, although it will predominantly be allocated towards shareholder distributions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the rating with continued strength in the coal pricing, and any material reduction in non-debt liabilities. However, the magnitude of rating upside remains constrained by the ESG and funding challenges faced by the sector over the long-run.
Moody's could downgrade the rating with weakening in metallurgical coal pricing below long-term averages, expectations for available liquidity to fall materially, or any meaningful operational issues at the company's Black Thunder or Leer mines.
Arch Resources is one of the largest coal producers in the United States. The company has two mining complexes in the Powder River Basin, four mining complexes in Appalachia, and one mine in Colorado. The company generated about $3.7 billion of revenue over the LTM period ending September 30, 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.
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At least one ESG consideration was material to the credit rating action(s) announced and described above.
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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
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U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
