Fitch Ratings has downgraded the Issuer Default Rating (IDR) and senior unsecured notes to 'B+' from 'BB-' for Arch Coal, Inc. (Arch Coal; NYSE: ACI). In addition, Fitch assigns a 'BB/RR1' rating to the prospective $1 billion, five year, term loan. A complete list of rating actions is at the end of this release.
The Rating Outlook is Stable.
Arch Coal announced commitments for a new $1 billion term loan and plans to reduce its revolver to $1 billion from $2 billion. The proceeds of the loan will reduce borrowings under the revolver ($425 million at March 31, 2012) and to repay $450 million Arch Western notes due July 1, 2013. The term loan will not have financial maintenance covenants. The revolver covenants will be amended with total leverage suspended over the next two years in favor of a new minimum EBITDA covenant.
Arch Coal benefits from large, well diversified operations and good control of low-cost production. 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. Weak earnings and high debt levels post the acquisition of International Coal Group in 2011 will result in high leverage metrics over the period offset by strong liquidity.
At March 31, 2012, pro forma liquidity remains solid, with cash on hand estimated at $200 million and $1 billion of availability estimated under the company's credit facilities. The $250 million accounts receivable facility matures Dec. 11, 2012, and is renewable annually. The $2 billion (reducing at transaction close to $1 billion) revolving credit facility matures in June 2016. Fitch expects Arch Coal to manage within the amended covenants.
Fitch expects negative free cash flows (operating cash flow less capital expenditures less dividends) could be between $150 million and $370 million for 2012. Pro forma current maturities are quite modest reflecting $10 million in term loan amortization per year and amounts due under the annually renewable accounts receivable facility ($106 million as of Dec. 31, 2011).
Total debt/EBITDA for the latest 12 months ended March 31, 2012 was 4.5 times (x). Upon initiating the rating in June 2011, Fitch had expected total debt/operating EBITDA to decline below 3.0x by the end of 2012 whereas Fitch currently expect leverage could be above 6.5x until the domestic steam coal market achieves balance.
The recovery rating on the senior secured bank facility of 'RR1' reflects outstanding recovery prospects given default. Fitch's methodology allows for a three notch uplift from the IDR. Fitch views two notches as appropriate in this instance at the 'B+' IDR level given compression.
The Stable Outlook reflects Fitch's expectation that Arch Coal will be free cash flow negative over the next 24 months but has sufficient liquidity to manage through the downturn.
Fitch would consider a negative rating action if liquidity deteriorates more than anticipated. Fitch would consider a positive rating action if debt levels are materially reduced.
Fitch has taken the following rating actions:
Arch Coal, Inc.
--IDR downgraded to 'B+' from 'BB-';
--Senior unsecured notes downgraded to 'B+/RR4' from 'BB-';
--Senior secured revolving credit facility assigned a recovery rating of 'RR1' and affirmed at 'BB'; and
--Prospective senior secured term loan assigned a rating of 'BB/RR1'.
Arch Western Finance, LLC
--Senior unsecured notes downgraded to 'B+' from 'BB-'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' dated Aug. 12, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology