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18 Feb 2011
Approximately $325 million of rated debt affected
New York, February 18, 2011 -- Moody's Investors Service upgraded International Coal Group,
Inc.'s ("ICG") Corporate Family Rating ("CFR")
and Probability of Default Rating to B2 from Caa1, respectively.
In addition, the ratings on the $125 million ABL revolver
due 2014 and $200 million second lien notes due 2018 were raised
to Ba2 and B2, respectively. The short-term liquidity
assessment was raised to SGL-2 from SGL-3. The rating
outlook is stable.
The upgrades and B2 CFR favorably reflect prospects for strong cash flow
from operations (before capital spending) over the intermediate-term,
a substantial reserve position, and an ongoing shift towards the
production of higher margin metallurgical coal used by the steel industry.
A low level of legacy liabilities, material increase in met coal
production, and the shift towards underground mining that somewhat
mitigates uncertainties surrounding surface mining permits provide additional
support to the ratings. However, the B2 CFR is constrained
by relatively low production levels, significant reliance on Central
Appalachian mines, and reliance on certain key mines. The
ratings also consider inherent operating and geologic risk associated
with coal mining, increased regulatory pressure, and the likelihood
that cash costs will continue to rise moderately over the intermediate
ICG controls 1.1 billion tons of coal reserves of which 320 tons
are met coal reserves, roughly three-fourths of which are
owned by the company. ICG derives the majority of its revenue from
coal produced in Central Appalachia, which has been subject to intense
regulatory scrutiny. Coal production has been historically weighted
heavily towards lower-margin thermal coal sold to utility customers
for coal-fired electric generation.
The SGL-2 Speculative Grade Liquidity Rating ("SGL")
denotes Moody's expectation that ICG will maintain good liquidity to support
operations over the near-term. Moody's expects ICG
will be able to cover basic cash obligations through internally generated
cash flow, but could rely on its $215 cash balance (reported
12/31/10) to fund expansionary capital expenditures. External liquidity
is provided by a $125 million asset-based revolving credit
facility, which Moody's expects will be utilized only to collateralize
letters of credit over the next twelve months. The revolver is
subject to a springing fixed charge coverage ratio test if availability
falls to below $40 million, but Moody's expects availability
to remain above this threshold over the near-term.
The stable rating outlook incorporates Moody's expectation that
over the next twelve to eighteen months ICG will be able to maintain its
cash margins, finance its capital spending program through a combination
of operating cash flow and balance sheet cash, and maintain good
liquidity. The outlook also incorporates the expectation that any
court ruling concerning ICG's lawsuit with Allegheny Energy Supply
will not have a material negative impact on ICG's financial health.
The outlook assumes that free cash flow could be modestly negative over
the near-term as ICG brings on production at the Tygart mining
There is limited ratings upside currently. However, positive
ratings pressure could develop overtime if ICG substantially meets and/or
exceeds its mine development, production and EBITDA targets,
improves its asset base to support higher cash margins, and maintains
good liquidity, and if the outlook for met coal continues to be
Negative ratings pressure could develop if we expect significant and sustained
deterioration in business conditions, cash margins, or liquidity,
or if there is materially adverse ruling in the Allegheny suit.
We could also consider a negative outlook or rating downgrade if we expect
ICG to use debt to finance its expansionary capital spending plans or
any potential acquisitions.
The following summarizes today's actions:
Ratings Upgraded --
..Corporate Family Rating B2 from Caa1
..Probability of Default Rating B2 from Caa1
$125 million asset based loan facility due 2014 Ba2 (LGD
2, 15%) from Ba3 (LGD 2; 18%)
$200 million second lien senior secured notes due 2018
B2 (LGD 4, 50%) from Caa1 (LGD 4; 57%)
Speculative grade liquidity assessment SGL-2 from SGL-3.
- Outlook remains stable.
The principal methodologies used in this rating were Global Mining Industry
published in May 2009, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
International Coal Group, Inc. operates 13 coal mining complexes
(8 in Central Appalachia, 4 in Northern Appalachia, and 1
in the Illinois Basin). ICG owns approximately two-thirds
of its 1.1 billion tons of coal reserves. The company produced
over 16 million tons of coal in 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
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Corporate Finance Group
Moody's Investors Service
Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades International Coal CFR to B2; outlook stable
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New York, NY 10007
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