Arch Coal Redeems $450M Senior Notes


Arch Coal, Inc.’s (ACI) subsidiary, Arch Western Finance, LLC bought back entire $450 million worth of 6.75% senior notes due in 2013. In the first phase, the company had redeemed $304 million worth of senior notes and recently completed the redemption of the remaining part. 

The company utilized a part of its six-year term-loan facility, worth $1 billion, to finance this $450 million senior note buyback. This is expected to decrease the company’s long-term debt level, which stood at $4 billion for the first quarter of 2012. The repurchases are also expected to reduce the company’s interest obligations of $74.8 million as of March 31, 2012.

This senior note buyback will also improve the capital structure and increase the company’s financial flexibility. The company’s long-term debt to equity ratio improved from 51.3% to 48.1%.  

Investors, however, did not take this bit of news encouragingly and Arch Coal shares dropped 8.2% to close at $6.34 on the New York Stock Exchange on May 31, 2012. We believe that the company failed to boost investor confidence due to its unimpressive performance in the recently concluded quarter. First quarter 2012 results were affected due to weak U.S. coal consumption as a result of adverse weather conditions and a decline in natural gas prices.

Despite these negatives, we believe that demand for coal in Asian and Latin American markets principally China, India, Japan and Brazil will increase in the near term, given increased power generation and steel production. This will act as a positive catalyst for the company’s top and bottom line growth in the future. Arch Coal recently acquired International Coal Group, which produces metallurgical coal through its properties in the Appalachian region. This acquisition is expected to strengthen the company’s portfolio.

Arch Coal, Inc. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

St. Louis, Missouri-based Arch Coal, Inc. engages in the production and sale of steam and metallurgical coal. The company also ships coal to domestic and international steel manufacturers as well as international power producers. The company competes with Peabody Energy Corporation (BTU).

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