Fitch Downgrades Arch Coal's IDR to 'B-'; Outlook Negative
NEW YORK -- May 10, 2013
Fitch Ratings has downgraded Arch Coal, Inc.'s (Arch Coal; NYSE: ACI) Issuer
Default Rating (IDR) and senior unsecured notes to 'B-' from 'B'. A complete
list of ratings follows at the end of this release.
The Rating Outlook is Negative.
KEY RATINGS 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 140.8 million tons of coal in 2012 accounting for
14% of the U.S. coal supply. Between 84% and 91% of 2013 expected volumes are
committed and priced. Assuming no change in sales volume for 2014, between 45%
and 48% of tons are committed and priced. The company has the second largest
coal reserve position in the U.S. at 5.5 billion tons.
The credit ratings also reflect oversupply in the domestic steam coal market
which is expected to result in substantially lower earnings through at least
2013. Visibility is constrained given lower than historic levels of committed
tonnage. Beginning in the second half of 2012, the metallurgical coal market
softened as supply rebounded and steel production slowed. Weak metallurgical
coal prices could persist beyond 2013.
Weak earnings combined with high debt levels post the acquisition of
International Coal Group in 2011 will result in high leverage metrics over the
ratings horizon. 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.
At Mar. 31, 2013, cash on hand was $730 million, short-term investments were
$248 million and Fitch estimates that $277 million was available under the
company's credit facilities. The $250 million accounts receivable facility
matures Dec. 10, 2013, and is renewable annually. The $350 million credit
facility matures in June 2016. Fitch expects Arch Coal to manage within the
amended covenants. Current maturities are quite modest reflecting $16.5
million in term loan B amortization per year.
Fitch expects free cash flow could be negative as much as $300 million for
2013 and neutral to slightly negative in 2014. Asset sales are not
The recovery rating on the senior secured bank facility of 'RR1' reflects
outstanding recovery prospects given default. Recovery of the senior unsecured
debt remains average.
The Negative Outlook reflects possibility that weak market conditions could
drag into 2014 and beyond. Total debt/adjusted EBITDA for the latest 12 months
ended March 31, 2013 was 9.7 times (x). Fitch anticipates leverage increasing
through the year and remaining elevated through at least 2014.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
Positive: Not anticipated over the next 12 months given over supply in the
domestic steam coal market but future developments that may lead to a positive
rating action include:
--Increased earnings and operating cash flow.
--Debt levels materially reduced and positive free cash flow on average.
Fitch has downgraded the following ratings:
--IDR to 'B-' from 'B';
--Senior unsecured notes to 'B-/RR4' from 'B/RR4';
--Senior secured revolving credit facility to 'BB-/RR1' from 'BB/RR1'; and
--Senior secured term loan to 'BB-/RR1' from 'BB/RR1'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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Monica M. Bonar, +1-212-908-0579
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Christopher M. Collins, CFA, +1-312-368-3196
Sean T. Sexton, CFA, +1-312-368-3130
Brian Bertsch, New York, +1-212-908-0549
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