Shares of Arch Coal, Inc. (ACI) continue to gain following the company’s announcement of its efforts to better financial flexibility. Shares gained nearly 5.1% over the last two days.
Arch Coal intends to increase the term loan facility by $300 million to $1.95 billion from $1.65 billion Term Loan B. Arch Coal also intends to eliminate certain financial covenants governing its senior secured credit facility. As a result, commitments under that facility would be reduced from $350 million to $250 million. These efforts are expected to enhance the financial flexibility of Arch Coal.
Arch Coal also announced a cash tender offer for its outstanding 8.75% $600 million Senior Notes due 2016. The prepayment is intended to lower the interest burden of the company. Arch Coal’s financial position is strong enough to fund the prepayment.
Earlier, the company had issued notes of lower coupon rate to fund redemption of notes bearing a higher coupon rate. This is a prudent approach that not only lowers the interest burden but also allows sufficient liquidity over a longer period.
One of the primary objectives of every business firm is to effectively lower its cost of capital in order to improve profitability. Moreover, the funds raised will allow the company to invest in infrastructure-related programs for a longer period of time at a cheaper cost.
Arch Coal’s long-term debt at the end of third-quarter 2013 totaled $5.07 billion, down 0.2% from 2012-end level. With the restructuring of the debt profile, the debt balance is expected to improve further.
Arch Coal presently carries a Zacks Rank #3 (Hold). However, better-ranked stocks in the same sector include Alpha Natural Resources, Inc. (ANR), Suncoke Energy Partners, L.P. (SXCP) and Cliffs Natural Resources Inc. (CLF). All these stocks carry a Zacks Rank #2 (Buy).