Published: January 13, 2016 |

[Click image to enlarge]

Adding Arch Coal, Inc.‘s $3.2 billion of bond debt to the default volume propels the metals/mining sector’s trailing 12-month (TTM) default rate to 15 percent from 11 percent at the end of December, according to Fitch Ratings. Arch’s Chapter 11 bankruptcy filing on Monday drives the coal subsector default rate to an unprecedented peak of 43 percent.

Metals/mining is a relatively small component of the overall US high yield debt market, accounting for just 5 percent total principal outstanding, which tempers the effect of coal’s profound distress on the broader US high yield market index. The TTM default rate for the total US high yield index is 3.4 percent.

US coal miners have been serial filers over the past year as a result of unsustainably high debt leverage from past acquisitions followed by a plunge in coal pricing. Three major coal producers, Patriot Coal Corp., Alpha Natural Resources Inc. and Walter Energy Inc., as well as some smaller metals/mining bond issuers including Xinergy Corp. and Winsway Enterprises Holdings Ltd defaulted in 2015. An oversupply of steam coal, burdensome regulations, and competition from low-priced natural gas for electric generation business drove low pricing and the resulting defaults.

Arch’s own bankruptcy filing was driven by free cash flow burn resulting from depressed metallurgical and steam coal prices and cash needed to cover capex and debt service following a large debt-funded acquisition made when coal prices and valuations were at the top of the market. The bankruptcy filing came in the face of stagnating domestic steam coal demand, limited port capacity for export to the Asia Pacific, oversupply in metallurgical coal markets, and unsustainable capital structures.

Arch’s efforts to complete a distressed debt exchange of unsecured debt out of court were stymied when senior secured facility lenders, concerned about diluting their own collateral position, effectively blocked the transaction by asserting the company was in default. Bankruptcy became the best option to stem the cash flow bleed and reduce the debt burden.

Arch has reached a restructuring agreement with a majority of lenders under its $1.9 billion first lien credit facility. The agreement lays out the terms of a pre-negotiated Chapter 11 filing, subject to creditor and bankruptcy court approval. Furthermore, the participating lenders agreed to eliminate more than $4.5 billion of debt and also provide a $275 million debtor in possession facility to provide incremental liquidity. The company had more than $600 million of cash on hand as of January 11.

The restructuring is aimed at reducing balance sheet debt, and the company intends to continue to pay suppliers, retiree, and employee health benefits in the ordinary course.

To stop by Fitch’s website, CLICK HERE

Be in-the-know when you’re on-the-go!

FREE eNews delivery service to your email twice-weekly. With a focus on lead-driven news, our news service will help you develop new business contacts on an on-going basis.
CLICK HERE to register your email address.

Copyright © 2016 Mining Connection LLC. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without permission.

For licensing permission, .(JavaScript must be enabled to view this email address)