CHICAGO Arch Coal, the second-largest U.S. coal miner, filed for Chapter 11 bankruptcy protection on Monday with a plan to cut $4.5 billion in debt from its balance sheet in the midst of a prolonged downturn in the coal industry.
Arch Coal, saddled with debt since its 2011 acquisition of International Coal Group, has been suffering from a sharp drop in coal prices, stricter pollution controls, falling demand from China and increasing competition from natural gas.
"Over the past several years, a confluence of economic challenges and regulatory hurdles has hobbled the coal industry," Chief Financial Officer John Drexler said in a filing with the U.S. Bankruptcy Court in St. Louis on Monday.
Shares of leading U.S. coal producer Peabody Energy Corp hit a record low on Monday and were still down 18.7 percent in afternoon, after Arch warned that 2016 pricing is expected to be weaker than initially feared.
"Initially, Peabody is in a better position to weather the storm, but we don't know how bad it's going to get," said Steve Piper, associate director of energy fundamentals at SNL Energy.
To restore its balance sheet, Missouri-based Arch said it has a debt-for-equity agreement that will give control of most of the company to senior lenders, which as of September included Eaton Vance Management Inc, Tennenbaum Capital Partners and Highland Capital Management.
It will also receive $275 million in debtor-in-possession financing and has more than $600 million in cash and short-term investments, enough to run its operations smoothly throughout the restructuring process, it said.
Arch Coal, with about 4,600 employees, expects mining operations and customer shipments to continue uninterrupted. Unlike other bankrupt miners including Walter Energy and Patriot Coal, the union-free miner said it has no labor issues that need resolving in Chapter 11.
Producers accounting for more than 25 percent of U.S. coal are currently in bankruptcy, based on 2013 government figures of major U.S. coal companies' production.
Loss-making Arch, which supplies both domestic and international clients, derives 84 percent of its coal from the high-performing Powder River Basin in Wyoming, but overall business has been hit by weakness in Central Appalachia.
"The Central Appalachia mines may require a fairly drastic spin-off in the bankruptcy process, and the Illinois Basin will also be closely watched," Piper said.
The company may still need to broaden the support among its creditors before seeking court approval for its bankruptcy plan.
Before filing for bankruptcy, Arch cut production, wages and prices and its dividend to fight falling demand for coal, which was surpassed by natural gas as the largest source of electricity in the United States for the first time last year.
Arch Coal was widely expected to go bankrupt after ending a previously proposed debt swap with lenders in October and delaying a $90 million interest payment due in December.
Arch Coal's notes have been trading at a deep discount, with unsecured notes trading in the secondary market at less than 1 cent on the dollar on Friday, court papers showed. Normally a company's shares are canceled after a bankruptcy filing.
(Additional reporting by Ankush Sharma in Bangalore; Editing by Paul Simao and Matthew Lewis)