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.
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