NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on Arch Coal, Inc. (Arch Coal; NYSE: ACI):
--Issuer Default Rating (IDR) downgraded to 'C' from 'CCC';
--Senior secured revolving credit facility affirmed at 'B/RR1';
--Senior secured term loan affirmed at 'B/RR1';
--Second lien secured notes affirmed at 'B-/RR2';
--Senior unsecured notes downgraded to 'C/RR5' from 'CCC-/RR5'.
Roughly $5.4 billion in principal amount of debt and commitments are affected by this action.
The downgrade follows Arch Coal's announcements of exchange offers which Fitch considers Distressed Debt Exchanges (DDE) in accordance with Fitch's Distressed Debt Exchange criteria.
KEY RATING DRIVERS
Arch Coal benefits from large, well-diversified operations and good control of low-cost production. Globally, Arch is the sixth largest coal producer based on volumes. The company sold 134 million tons of coal in 2014. As of March 31, 2015, roughly 97% of expected 2015 steam coal production volumes are committed and priced. Assuming no change in sales volume for 2016, about 41% of steam tons are committed and priced. The company has the third largest coal reserve position in the U.S. at 5.1 billion tons.
Steam coal demand in the U.S. is currently suffering from heavy competition from very low natural gas prices, supply has been disciplined, but stocks are on the high side and prices are soft. Lack of new coal fired power plant builds and shuttering obsolete plants constrains growth in the U.S. Globally, both metallurgical (met) and steam coal markets are in excess supply and prices are weak. Coal producers have been running for cash with a focus on reducing costs which has delayed price recovery. In particular, Fitch believes the hard coking coal bench mark price could average about $110/tonne (t) and the Newcastle steam coal benchmark could be below $62/t over the next 12 months versus current prices of $93/t and $67.80/t respectively. The industry is consolidating, which should benefit supply/demand dynamics longer term.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Lack of material improvement in top line results or absence of liquidity enhancements over the next 12-18 months.
Positive: Future developments that may lead to a positive rating action include:
--Debt levels materially reduced and free cash flow generation that is expected to be positive on average.
LIQUIDITY AND DEBT STRUCTURE
At March 31, 2015, cash on hand was $690 million, short-term investments were $250 million, and Fitch estimates that $250 million was available under the company's credit facilities. The $200 million accounts receivable facility has a stated maturity in December 2017. The $250 million revolving credit facility matures in June 2016. Revolver covenants include a maximum net senior secured leverage ratio of 5:1 from June 30, 2015 with step-downs thereafter and a minimum liquidity of $550 million through Dec. 30, 2015. Fitch expects cash and short-term investments to provide sufficient liquidity through 2017.
Free Cash Flow Burn
Cash burn is expected to continue absent substantial recovery in met coal prices. Excluding the effects of the exchange, guidance for cash interest expense is $360 million to $370 million and for capital expenditure is $140 million to $155 million for 2015. Fitch expects cash burn of at least $200 million per year through 2017.
Arch's actions to preserve liquidity since 2012 coupled with three years of losses have resulted in a debt/capital ratio at 77%. The exchanges could improve debt/capitalization below 70% and improve interest coverage although Fitch expects this to remain below 1x for 2015.
Estimated current scheduled maturities of debt are $34.4 million in 2015, $29.9 million in 2016, $30.1 million in 2017, $1.9 billion in 2018, $1.7 billion in 2019 and $1.5 billion thereafter. The bulk of the 2018 maturity consists of the senior secured term loan due 2018. Of the amounts due in 2019, the $1 billion 7% senior unsecured notes, the $375 million 9.875% senior unsecured notes are subject to an exchange offer. The $1 billion 7.25% senior notes due 2021 is subject to the same offer. The $500 million 7.25% senior unsecured notes due 2020 are subject to another offer.
--Production, costs, and capital expenditures within guidance range for 2015;
--Coal prices bottom out in 2015 with scant recovery thereafter.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
Distressed Debt Exchange (pub. 12 Jun 2015)
Dodd-Frank Rating Information Disclosure Form