Turnarounds

Arch Joins Coal Industry’s Bankruptcy Parade

The No. 2 U.S. thermal coal miner cites depressed demand and regulatory hurdles for the latest in the industry's Chapter 11 filings.
Matthew HellerJanuary 11, 2016

Arch Coal, one of the largest U.S. coal producers, filed Monday for bankruptcy protection, saying it could no longer sustain a debt burden of more than $5 billion in the current depressed coal market.

Arch CFO John Drexler noted in a court document that “virtually all” major U.S. coal companies are in distress as a result of falling coal prices and environmental regulations that have made it more expensive for electricity and steel companies to use coal. Patriot Coal, Walter Energy, and Alpha Natural Resources were pushed into bankruptcy last year.

“Over the past several years, a confluence of economic challenges and regulatory hurdles has hobbled the coal industry,” Drexler said.

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Coal’s share of electricity generation in the U.S. fell to 30% in April as the historically popular fuel was overtaken by gas for the first time. St. Louis-based Arch is the second-biggest thermal coal miner, behind Peabody Energy.

Arch’s Chapter 11 filing followed unsuccessful talks with creditors to approve a debt swap designed to postpone the maturity of Arch bonds. The company said Monday it had reached a restructuring agreement with lenders that hold more than 50% of its $1.9 billion in first-lien debt.

“In broad outline, Arch is proposing a debt-for-equity swap that would leave most of the company in the hands of the first-lien lenders, while unsecured creditors owed billions would be offered options, including a share of 4% of the equity in the reorganized coal company,” the Wall Street Journal said.

“After carefully evaluating our options, we determined that implementing these agreements through a court-supervised process represents the best way to solidify our financial position and strengthen our balance sheet,” CEO John W. Eaves said in a statement.

With $600 million in cash on hand, and a $275 million bankruptcy loan on the way, Arch said it would be able to continue normal mining operations during bankruptcy proceedings.

“This is the end of a period where coal producers can expect to lever up and be able to service outsize debt profiles,” Ted O’Brien, chief executive officer of Doyle Trading Consultants, told Bloomberg.

“Arch’s Chapter 11 bankruptcy filing on Monday drives the coal subsector default rate to an unprecedented peak of 43%,” Fitch Ratings said in a note. “[The] 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 … and [it] 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.”

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