-- U.S.-based coal producer James River Coal Co. repurchased $61
million of its debt at a discount but remains highly leveraged in our view.
-- We have raised our corporate credit rating on the company to 'CCC'
from 'SD' (selective default).
-- We have also raised our rating on the company's 7.875% senior notes
due 2019 to 'CCC+' from 'D' and raised the rating on the company's 4.5% and
3.125% convertible notes to 'CC' from 'D'.
-- The negative outlook reflects our view that the current market
conditions, including a rapid decline in demand for coal, will continue to
hurt the company's near-term operating performance.
On Nov. 15, 2012, Standard & Poor's Ratings Services raised its corporate
credit rating on Richmond, Va.-based James River Coal Co. to 'CCC' from 'SD'
(selective default). The outlook is negative.
At the same time, we raised our issue rating on the company's 7.875% senior
notes due 2019 to 'CCC+' (one notch above the corporate credit rating) from
'D'. The recovery rating on these notes remains '2', indicating our
expectation for substantial (70%-90%) recovery in the event of payment
default. We also raised our issue-level rating on the company's 4.5% and
3.125% convertible notes to 'CC' (two notches below the corporate credit
rating) from 'D'. The recovery rating on these notes remains '6', indicating
our expectation for negligible (0%-10%) recovery in the event of payment
We raised our rating on James River Coal because we understand that the
company has stopped repurchasing its debt at deep discounts, for the time
being. On Nov. 7, we lowered our corporate credit rating on James River to
'SD' and lowered our rating on the company's notes to 'D' because we
considered the discounted repurchase of $61 million of debt (at approximately
60% of face value) to be tantamount to default under our criteria for exchange
offers and similar restructurings. Still, we view the company's debt burden to
be unsustainable in the long term, and we recognize the potential for
additional distressed exchanges or redemptions in the next 12 months.
The corporate credit rating on James River Coal reflects what Standard &
Poor's considers to be the combination of the company's "highly leveraged"
financial risk and "vulnerable" business risk, characterized by the company's
small size, high debt burden, and "less-than-adequate" liquidity. In addition,
James River Coal faces the challenges of operating in the Central Appalachian
(CAPP) region, which is becoming increasingly expensive and difficult to mine
because of mature, thinning seams; escalating costs; and stringent permitting
and safety regulations.
As of November 2012, the company has priced 3.4 million tons of its 2013 CAPP
coal tonnage at an average price of about $74 per ton and 2.3 million tons of
its 2013 Midwest coal tonnage at an average price of about $45 per ton. In
addition, the company had sold about 1.1 million tons of its 2013
metallurgical (met) coal tonnage that it had not yet priced. Thermal coal
production costs in CAPP are about $70 to $80 per ton, which we believe are
among the highest in the region.
Our base-case scenario anticipates that James River Coal will generate about
$100 million in adjusted EBITDA in 2012, lower than the $170 million in EBITDA
the company generated in 2011, because of lower prices and higher costs. As a
result, debt-to-EBITDA is likely to be around 7x or higher by year end, and
the company is likely to burn cash. For 2013, Standard & Poor's believes that
high coal inventories and low natural gas prices will likely keep coal prices
weak. In addition, export prices for met coal are unlikely to be high enough
to offset domestic weakness, and port capacity is limited. In addition, weak
global steel demand will likely keep prices from increasing significantly.
Given that James River Coal has contracted a very small amount of tonnage in
2013, EBITDA and liquidity will likely decline from 2012 levels.
Coal demand is highly cyclical. With increased competition from natural gas
because of its greater supply, the swings in demand as a result of the economy
can be more significant than has historically been the case. We remain
concerned that CAPP coal producers will continue to lose market share to the
Powder River Basin and Northern Appalachian coal-producing regions during the
next several years as output from the CAPP region continues to shrink because
of difficult operating conditions.
Given our operating expectations, we view James River Coal's liquidity as
"less-than-adequate." Our view of the company's liquidity profile includes
-- Liquidity sources (including cash and availability under the company's
$100 million revolving credit facility) will exceed uses by at least 1.2x over
the next year and at least 1.0x over the next 18 to 24 months;
-- We believe the company could face covenant pressure in 2013 if
shipments and pricing don't improve; and
-- We don't believe the company would be able to absorb high-impact, low
The company had total liquidity of $171.7 million on Sept. 30, 2012,
consisting of $151.4 million of cash and $20.3 million of borrowing capacity
under the company's revolving credit facility. In 2012, we expect the company
to burn between $25 million and $50 million of cash, as we don't believe cash
flows from operations will be enough to cover capital expenditures. In 2013,
barring an improvement in shipments and pricing, which at this point we do not
anticipate, we expect the company to use more cash than in 2012.
James River Coal's revolving credit facility is governed by a maximum capital
expenditures covenant, which is triggered when total liquidity falls below $50
million, and a minimum fixed-charge covenant, which is triggered when total
liquidity falls below $35 million. Although we expect the company to maintain
adequate headroom under these covenants in 2012, we believe headroom could
tighten in 2013 because we think the company's liquidity is likely to
deteriorate. James River Coal does not have any significant maturities until
2015, which is when its revolving credit facility and 4.5% convertible notes
The issue-level rating on James River Coal's 7.875% senior notes is 'CCC+'
(one notch above the corporate credit rating), with a recovery rating of '2',
indicating our expectation for substantial (70% to 90%) recovery in the event
of payment default. The issue-level rating on the company's 4.5% and 3.125%
convertible notes is 'CC' (two notches below the corporate credit rating),
with a recovery rating of '6', indicating our expectation for negligible (0%
to 10%) recovery in the event of payment default.
The negative outlook reflects our view that although the company's liquidity
is likely to remain sufficient to cover its financial obligations over the
near term, liquidity could become strained barring an improvement in shipments
and pricing in 2013. It also takes into account the extremely difficult
operating environment for James River Coal as a relatively high-cost producer
in the CAPP basin and our expectations the company will burn cash and post
debt-to-EBITDA of 7x or higher in 2012 and 2013.
We could lower our rating if the company's liquidity deteriorates, such that
cash burn accelerates, and the cushion narrows on the covenants that govern
its credit facility. This could occur if coal pricing remains weak into 2013.
A positive rating action is unlikely in the near term, given the challenging
operating conditions and weak demand for coal. However, one could occur if
market demand and pricing gained significant positive momentum such that James
River Coal could significantly increase its production, secure long-term
contracts at economic prices for its coal, and improve its liquidity.
Temporary telephone contact numbers: Megan Johnston (917-715-3892); Gayle
Related Criteria And Research
-- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In the Mining
Industry, June 23, 2009
-- Rating Implications Of Exchange Offers And Similar Restructurings,
Update, May 12, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Upgraded; Outlook Action
James River Coal Co.
Corporate Credit Rating CCC/Negative/-- SD/--/--
Senior Unsecured CC D
Recovery Rating 6 6
James River Escrow Inc.
Senior Unsecured CCC+ D
Recovery Rating 2 2