Fitch Affirms Arch Coal's IDR at 'CCC'
07 May 2015 - 12:15AM
Business Wire
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
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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