What credit rating agencies think about Arch coal
Industry overview: The shifting sands of US coal production (Part 10 of 18)
Negative outlook
Moody’s Corporation (MCO) rated Arch Coal Inc (ACI) at B3 with a negative outlook. For its part, Standard & Poor’s (MFHI) rated the company at B with a negative outlook. These ratings factor in the company’s highly leveraged balance sheet as well as weak met and thermal coal markets. Moody’s has assigned its negative outlook with an expectation that the company will keep burning cash unless there is a substantial recovery in coal prices. Ratings of B/B3 correspond to a high credit risk (JNK). Fitch has rated the company at CCC, for very high credit risk.
Stock prices
Arch Coal’s stock value lost 67.7% since the beginning of the year, finishing at $1.50 on October 10. While the stock has lost substantial value, it has performed better than Walter Energy, Inc. (WLT) and Alpha Natural Resources, Inc. These companies lost 91% and 75.6%, respectively, during the same period.
The pattern is easy to understand. Those companies with a larger presence in met coal have lost more. Falling stock prices, a leveraged balance sheet, or weak industry outlook may make the company an easy target for acquisition or force the management to fire-sell assets.
Probability of default
The likelihood that Arch Coal will default—fail to repay its debt—increases at pace with its falling stock prices. Debt levels remain elevated, and cash burn continues. If the cash burn continues for a few more quarters, the company may find it difficult to survive without restructuring, refinancing, or selling off its assets.
We’ll look at Peabody Energy Corporation (BTU) in the next three parts of this series.
Browse this series on Market Realist:
