Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )
 January 11, 2016 - 1:38 PM EST
Print Email Article Font Down Font Up
Fitch: Coal Producer Bankruptcy Bumps Up US Default Rates, Again

Adding Arch Coal, Inc.'s $3.2 billion of bond debt to the default volume propels the metals/mining sector's trailing 12-month (TTM) default rate to 15% from 11% at the end of December, according to Fitch Ratings. Arch's Chapter 11 bankruptcy filing on Monday drives the coal subsector default rate to an unprecedented peak of 43%.

Metals/mining is a relatively small component of the overall US high yield debt market, accounting for just 5% total principal outstanding, which tempers the effect of coal's profound distress on the broader US high yield market index. The TTM default rate for the total US high yield index is 3.4%.

US coal miners have been serial filers over the past year as a result of unsustainably high debt leverage from past acquisitions followed by a plunge in coal pricing. Three major coal producers, Patriot Coal Corp., Alpha Natural Resources Inc. and Walter Energy Inc., as well as some smaller metals/mining bond issuers including Xinergy Corp. and Winsway Enterprises Holdings Ltd defaulted in 2015. An oversupply of steam coal, burdensome regulations and competition from low-priced natural gas for electric generation business drove low pricing and the resulting defaults.

Arch's own bankruptcy filing was driven by free cash flow burn resulting from depressed metallurgical and steam coal prices and cash needed to cover capex and debt service following a large debt-funded acquisition made when coal prices and valuations were at the top of the market. The bankruptcy filing came in the face of stagnating domestic steam coal demand, limited port capacity for export to the Asia Pacific, oversupply in metallurgical coal markets and unsustainable capital structures.

Arch's efforts to complete a distressed debt exchange of unsecured debt out of court were stymied when senior secured facility lenders, concerned about diluting their own collateral position, effectively blocked the transaction by asserting the company was in default. Bankruptcy became the best option to stem the cash flow bleed and reduce the debt burden.

Market expectations are for junior bond holders to receive essentially no recoveries based on trading prices. The first lien term loan was bid at 41.67, while the second lien notes and unsecured bonds were bid end of day Friday at $0.026 and $.0.004, respectively, as the market expects holders to be essentially wiped out in the restructuring. Fitch is updating the RR analysis based on the new management forecast released today with more adverse assumptions. See rating action commentary "Fitch Downgrades Arch Coal's Sr. Secured Credit Facilities to 'CCC-/RR2'," dated Oct. 27, 2015, for further details on Fitch's recovery rationale.

Arch has reached a restructuring agreement with a majority of lenders under its $1.9 billion first lien credit facility. The agreement lays out the terms of a pre-negotiated Chapter 11 filing, subject to creditor and bankruptcy court approval. Furthermore, the participating lenders agreed to eliminate more than $4.5 billion of debt and also provide a $275 million debtor in possession facility to provide incremental liquidity. The company had more than $600 million of cash on hand as of today.

The restructuring is aimed at reducing balance sheet debt, and the company intends to continue to pay suppliers, retiree and employee health benefits in the ordinary course.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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 Ratings
Sharon Bonelli, +1 212 908-0581
Senior Director
Leveraged Finance
33 Whitehall Street
New York, NY
or
Eric Rosenthal, +1 212 908-0286
Senior Director
Leveraged Finance
or
Kellie Geressy-Nilsen, +1-212-908-9123
Senior Director
Fitch Wire
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com


Source: Business Wire (January 11, 2016 - 1:38 PM EST)

News by QuoteMedia
www.quotemedia.com