Fitch Ratings has downgraded Arch Coal, Inc.'s (Arch Coal; NYSE: ACI)
Issuer Default Rating (IDR) to 'D' from 'C'. The downgrade reflects
today's voluntary bankruptcy filing. Fitch has taken the following
--IDR downgraded to 'D' from 'C';
--Senior secured term loan downgraded to 'C/RR4' from 'CCC-/RR2';
--Second lien secured notes affirmed at 'C/RR6';
--Senior unsecured notes affirmed at 'C/RR6'.
Roughly $5.1 billion in principal amount of debt and commitments are
affected by this action.
The bankruptcy filing follows the missed payment of $90 million
aggregate semi-annual coupons on the $1 billion 7% notes, the $375
million 9.875% notes and the $1 billion 7.25% notes due on Dec. 15, 2015.
The company's capital structure came under pressure following the
leveraged acquisition of International Coal Group in 2011 followed by a
prolonged slide in metallurgical coal prices and spending to complete
the Leer mine. Arch had initiated a distressed debt exchange offer to
reduce its outstanding debt and interest payments in July 2015. First
lien term loan holders prohibited necessary actions by the facility
agent to affect the transaction and the offer was withdrawn in October
Failure of the metallurgical coal market to recover compounded by low
natural gas price competition with steam coal, especially in the high
cost Central Appalachian basin, has resulted in several large coal
bankruptcies in recent years such as James River Coal Company, Patriot
Coal Corp., Alpha Natural Resources Inc. and Walter Energy Inc.
The downgrade of Arch's first lien senior secured ratings reflects a
halving of Fitch's going concern EBITDA assumption from $400 million to
$200 million based on lower volumes and uncommitted pricing assumptions.
The bankruptcy filing lists total assets of $5.8 billion and total debts
of $6.5 billion as of Sept. 30, 2015.
In connection with the filing, the company entered into a Restructuring
Support Agreement dated Jan. 10, 2016, with certain holders of the first
lien term loans that would support a restructuring upon reorganization
under certain terms and conditions. Principal among these are:
extinguishment of the existing common stock; claims arising from a new
$275 million Debtor-in-Possession (DIP) financing to be permitted to be
satisfied in cash; claims of the first lien term loan holders to be
exchanged for a combination of cash and $326.5 million of new first lien
debt and 100% of the common stock of the reorganized company, subject to
dilution on account of a proposed management incentive plan and the
distribution to unsecured creditors of any new common stock and
warrants; and first lien term loan deficiency claims as well as second
lien notes, unsecured notes and general unsecured claims against the
debtors to be exchanged for either common stock in the reorganized
company and warrants or the value of unencumbered assets of the company,
if any. The agreement was entered into by holders of over 50% of the
first lien term loans.
If the reorganization follows the restructuring plan it would reduce
Arch's long-term debt by more than $4.5 billion reducing total debt to
EBITDA to about 2 times (x) which would be sustainable even in a weak
Arch expects that its securitization financing providers will continue
its $200 million trade accounts receivable securitization facility,
subject to customary conditions, which supports Arch's letters of credit
program. The company had more than $600 million of cash on hand as of
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.
ACI submitted revised projections as an exhibit to its form 8K filed
Jan. 11, 2016, which show reduced volumes and prices and a decline in
EBITDA from $374 million for the latest 12 months ended Sept. 31, 2015
to $152 million for 2017. Fitch has dropped its going concern estimated
EBITDA to $200 million from $400 million which drops the going concern
enterprise value to $1.1 billion using a 5.5x multiple to reflect lower
volumes and weaker pricing prospects. Under this valuation, the first
lien senior secured debt including an assumption of 100% utilization
under the $200 million accounts receivable facility, has recovery given
default at 50%. The second lien and senior unsecured debt have no
A substantial portion of domestic coal production is in restructuring.
Alpha Natural Resources, Inc., Walter Energy, Inc., James River Coal
Company, and Patriot Coal Corporation, together, all of which have filed
for bankruptcy, accounted for about 13% of U.S. coal production in 2013
and Arch accounted for an additional 13%. Recently, coal assets have
changed hands at very distressed values comprising little or no cash
given the need to invest in capital and fund reclamation expenditures as
well as legacy pension and other postretirement liabilities.
In contrast to other restructuring companies, Arch benefits from
relatively low exposure to employee legacy liabilities and as of Dec.
31, 2014, only six of its 5,000 employees belonged to a union.
Self-bonding of $458.5 million, $177.7 million surety bonds, and $3.5
million in secured letters of credit support reclamation obligations as
of Dec. 31, 2014. These would need to be assumed or replaced in the
event of asset sales or an acquisition.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Distressed Debt Exchange (pub. 12 Jun 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers (pub. 07 Dec 2015)
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