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TEXT - Fitch cuts Arch Coal ratings
November 13, 2012 / 3:55 PM / 5 years ago

TEXT - Fitch cuts Arch Coal ratings

Nov 13 - Fitch Ratings has downgraded the Issuer Default Rating (IDR) and
senior unsecured notes to 'B' from 'B+' for Arch Coal, Inc. (Arch Coal;
NYSE: ACI). In addition, Fitch assigns a 'B/RR4' rating to the prospective $350
million, seven year senior unsecured notes. A complete list of rating actions is
at the end of this release.

The Rating Outlook is Negative.

Arch Coal announced plans for a new $250 million term loan and a reduction in 
its revolver to $350 million from $600 million.  Together with the $350 million 
new notes, the net proceeds estimated at $570 million will enhance liquidity. 

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. Visibility is constrained given lower than historic 
levels of committed tonnage. 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 Sept. 30, 2012, pro forma liquidity remains solid, with cash on hand 
estimated at $1.2 billion and $350 million of availability estimated under the 
company's credit facilities. The $250 million accounts receivable facility 
matures Dec. 11, 2012, and is renewable annually. The $600 million (reducing at 
transaction close to $350 million) revolving credit facility matures in June 
2016. Fitch expects Arch Coal to manage within the amended covenants.

Fitch expects slight negative free cash flows (operating cash flow less capital 
expenditures less dividends) for 2012. Negative free cash flows could be between
$300 million and $500 million for 2013 depending on actual volumes and pricing. 
Pro forma current maturities are quite modest reflecting $16.5 million in term 
loan amortization per year and amounts due under the annually renewable accounts
receivable facility ($100 million as of Sept. 30, 2012).

Total debt/EBITDA for the latest 12 months ended Sept. 30, 2012 was 5.2x. Fitch 
expects leverage could be above 6.5x until the domestic steam coal market 
achieves balance which could stretch into 2014.

The recovery rating on the senior secured bank facility of 'RR1' reflects 
outstanding recovery prospects given default. Fitch's methodology counts undrawn
revolver balances as senior secured debt so that the only change from the 
transaction is the additional $350 million senior unsecured debt which dilutes 
coverage at that level slightly. Recovery of the senior unsecured debt remains 

The Negative Outlook reflects the possibility that weak market conditions could 
drag into 2014 and that Arch has sufficient liquidity to manage through the 


Negative: Future developments that may, individually or collectively, lead to 
negative rating action include:

--Should anticipated cash burn be greater than $400 million in 2013. 

--Constrained liquidity.

Positive: Not anticipated over the next 12 months given over supply in the 
domestic steam coal market but future developments that may lead to a positive 
rating action include:

--Debt levels material reduced and positive free cash flow on average.

Fitch has taken the following rating actions:

Arch Coal, Inc.
--IDR downgraded to 'B' from 'B+';
--Senior unsecured notes downgraded to 'B/RR4' from 'B+RR4';
--Senior secured revolving credit facility affirmed at 'BB/RR1'; and
--Senior secured term loan affirmed at 'BB/RR1'.

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