TEXT-S&P cuts Patriot Coal Corp to 'B-'

Wed May 16, 2012 12:03pm EDT

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
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