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 January 12, 2016 - 11:27 AM EST
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Fitch Downgrades Arch Coal to 'D' on Bankruptcy Filing

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 rating actions:

--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lien term loan holders prohibited necessary actions by the facility agent to affect the transaction and the offer was withdrawn in October 2015.

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 environment.

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 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.

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 recovery.

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.

RATING SENSITIVITIES

N/A

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Distressed Debt Exchange (pub. 12 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867091

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 07 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873504

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997750

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997750

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Monica M. Bonar
Senior Director
+1-212-908-0579
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Gregory Fodell
Associate Director
+1-312-368-3117
or
Committee Chairperson
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
Email: alyssa.castelli@fitchratings.com


Source: Business Wire (January 12, 2016 - 11:27 AM EST)

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