Fitch Ratings said Dec. 12 that it has downgraded Arch Coal’s (NYSE: ACI) senior unsecured notes to ‘CCC+/RR5’ from ‘B-/RR4’.
Fitch has also assigned a ‘B+/RR2’ rating to Arch Coal’s prospective $300m second lien senior secured notes due January 2019. Net proceeds of the notes are expected to be used for the tender offer for the $600m 8.75% senior notes due 2016. The Rating Outlook is Negative.
St. Louis-based Arch Coal is one of the nation’s largest coal producers, though it trimmed itself down somewhat this year with the sale of its three coal mines in Utah to privately-held Bowie Resources.
The downgrade of the senior unsecured ratings reflects the lower recovery expectations given that the $300m incremental term loans as well as the $300m second lien notes together with the $1.6bn existing secured term loans and expected borrowings under the receivables facility and senior secured revolver have higher priority, Fitch explained. The Recovery Rating on the senior secured bank facility of ‘RR1’ reflects outstanding recovery prospects given default. Recovery on the second lien senior notes is superior and on the senior unsecured debt is below average.
“The credit ratings also reflect oversupply in the global coal markets and high debt levels,” Fitch added. “Steam coal demand in the U.S. is recovering, stocks are falling and prices should improve going forward. Globally, both metallurgical (met) and steam coal are in excess supply and prices are weak. Coal producers have been running for cash with a focus on reducing costs, which is expected to delay price recovery. In particular, Fitch expects the hard coking coal bench mark price to average about $160/tonne (t) and the Newcastle steam coal benchmark to be below $90/t over the next 12 months. The industry is consolidating which should benefit supply/demand dynamics longer term.”
Fitch says Arch has certain benefits of size and low costs
Arch Coal benefits from large, well-diversified operations and good control of low-cost production, Fitch noted. Globally, Arch is the sixth largest coal producer based on volumes. The company sold 140.8 million tons of coal in 2012 accounting for 14% of U.S. coal supply. At least 95% of 2013 expected volumes are committed and priced and more than 60% is committed and priced for 2014. The company has the second largest coal reserve position in the U.S. at 5.4 billion tons, Fitch added.
Weak earnings combined with high debt levels after the acquisition of International Coal Group in 2011 will result in high leverage metrics over the ratings horizon, Fitch said. Liquidity should remain adequate despite the prospect of negative free cash flow. Fitch expects financial leverage to remain elevated until industry-wide production cuts have resulted in more balanced steam and metallurgical coal markets.
Arch Coal announced Dec. 12 that it has commenced a private offering of $300m aggregate principal amount of senior secured second lien notes due 2019 (the “2019 Notes”). The 2019 Notes will be secured on a second priority basis, subject to certain exceptions and permitted liens, by the assets of Arch and Arch’s subsidiaries that guarantee indebtedness under Arch’s existing senior secured credit facility on a first priority basis. Such subsidiaries will guarantee the 2019 Notes on a senior secured basis.
Arch said it intends to use the net proceeds from the offering of the 2019 Notes, together with the net proceeds of a Term Loan B facility and cash on hand, to fund the purchase of any and all of its outstanding 8.750% Senior Notes due 2016 (the “2016 Notes”) in its previously announced tender offer and consent solicitation (the “Tender Offer”) and the redemption of any of the 2016 Notes that remain outstanding if Arch purchases less than all of the outstanding 2016 Notes in the Tender Offer.