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 anticipated.
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