Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Arch Coal, Inc. (Arch Coal; NYSE: ACI) at 'CCC'. Roughly $4.5 billion in principal amount of debt and commitments are affected by this action. A complete list of rating actions follows at the end of this release.

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. 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 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 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 $109.50/t and $67.80/t respectively. The industry is consolidating, which should benefit supply/demand dynamics longer term.

Liquidity

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 with a stated maturity in December 2017, and is renewable annually. The $250 million 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 does not expect Arch Coal to be in compliance with the covenant at 2015 year end but 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. 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. Estimated 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. Amounts due beyond 2017 will need to be refinanced or restructured.

Capital Structure

Arch's actions to preserve liquidity since 2012 coupled with three years of losses have resulted in a debt/capital ratio at 77%. Fitch expects earnings to be weak and leverage to remain elevated through at least 2016.

Recovery

Fitch expects the senior secured bank facilities have outstanding recovery prospects in a default scenario, while the second lien notes have superior and the senior unsecured notes have below average recovery prospects.

KEY ASSUMPTIONS

--Production, costs, and capital expenditures within guidance range for 2015;

--Coal prices bottom out in 2015 with scant recovery thereafter.

RATING SENSITIVITIES

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: Not anticipated over the next 12 months given industry conditions but future developments that may lead to a positive rating action include:

--Debt levels materially reduced and free cash flow generation is expected to be positive on average.

Fitch has affirmed Arch Coals' ratings as follows:

--IDR at 'CCC';

--Senior secured revolving credit facility at 'B/RR1';

--Senior secured term loan at 'B/RR1';

--Second lien secured notes at 'B-/RR2';

--Senior unsecured notes at 'CCC-/RR5'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology' (May 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984184

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch RatingsPrimary AnalystMonica M. BonarSenior Director+1-212-908-0579Fitch Ratings, Inc.33 Whitehall St.New York, NY 10004orSecondary AnalystGregory FodellAssociate Director+1-312-368-3117orCommittee ChairpersonMichael WeaverManaging Director+1-312-368-3138orMedia RelationsAlyssa Castelli, +1 212-908-0540alyssa.castelli@fitchratings.comElizabeth Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com