TEXT-S&P cuts Patriot Coal Corp to 'B-'
Overview -- We expect U.S.-based coal producer Patriot Coal Corp.'s 2012 operating performance to be less than our previous expectations because of weaker demand in the coal markets. -- We are lowering our ratings on Patriot Coal, including the corporate credit rating to 'B-' from 'B'. -- The ratings remain on CreditWatch with negative implications, where they were placed on Jan. 23, 2012. -- In resolving the CreditWatch listing, we will update our performance expectations and meet with management to discuss its proposed refinancing of its convertible notes and near-term liquidity expectations. Rating Action On May 16, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on St. Louis, Mo.-based Patriot Coal Corp. (Patriot) to 'B-' from 'B'. At the same time, we lowered our issue-level rating on the company's senior unsecured debt to 'B-' (the same as the corporate credit rating) from 'B'. The recovery rating remains '3'. The ratings remain on CreditWatch with negative implications where they were placed on Jan. 23, 2012. Rationale The CreditWatch listing reflects a decline in coal production as a result of weaker demand for metallurgical (met) coal in the export market and weaker demand for thermal coal because of a warmer-than-normal winter and natural gas substitution that has consequently lowered our expectations for 2012 EBITDA and has, in our view, the company continuing to burn cash. The rating also reflects the possibility of continued production curtailments, as in the recent announcement that a "key customer" is potentially going to default, leading to an adjustment of Patriot's coal-price and volume forecasts for 2012 and 2013. The corporate credit rating on Patriot Coal reflects the combination of what we consider to be the company's "weak" business risk profile and "highly leveraged" financial risk profile. The company has significant exposure to the high-cost Central Appalachia region and faces challenges posed by the inherent risks of coal mining, including operating problems, price volatility, and increasing costs and regulatory scrutiny. CreditWatch In resolving the CreditWatch listing, we will review our performance expectations and Patriot's liquidity position, and assess its operating prospects to determine whether a lower rating is warranted, absent the proposed refinancing. This will include meeting with management to discuss its near-term operating and financial prospects, including end-market demand trends. Related Criteria And Research -- Key Credit Factors: Methodology And Assumptions On Risks In The Mining Industry, June 23, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 Ratings List Downgraded To From Patriot Coal Corp. Corporate Credit Rating B-/Watch Neg/-- B/Watch Neg/-- Senior Unsecured B-/Watch Neg B/Watch Neg Recovery Rating 3 3