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Fitch cuts ratings for Arch Coal citing oversupply

NEW YORK (AP) -- Fitch Ratings on Tuesday cut its issuer default rating for Arch Coal Inc. to "B'' from "B+," citing the oversupply of certain kinds of coal on the market. That pushes Arch further into non-investment or junk territory.

Fitch also lowered its rating for the St. Louis-based coal producer's senior unsecured notes to "B'' from "B+" and assigned a "B'' rating to the company's prospective $350 million, seven-year senior unsecured notes. The outlook is negative.

Arch has plans for a $250 million term loan and a reduction of its revolver to $350 million from $600 million. Together with the $350 million in new notes, net proceeds are estimated at $570 million and are expected to boost the company's liquidity, Fitch said.

Fitch said that Arch benefits from large, diversified operations and strong control of low-cost production. But an oversupply in the domestic steam coal market is expected to result in substantially lower profits through at least next year, the ratings agency said.

The coal industry has been battered as utilities switch from coal to cheaper natural gas. The futures price of natural gas hit a 10-year low of $1.91 per thousand cubic feet in April because of booming gas production, although the price has rebounded in recent months.

Fitch added that it's unclear what Arch's sales will look like down the road, given the drop in coal demand. And weak earnings and high debt levels following last year's acquisition of International Coal Group will result in high debt levels over the next year, offset by strong cash reserves.

Fitch said the negative outlook reflects the possibility that weak market conditions could last into 2014, but it noted that Arch has enough cash to last through the downturn.

Arch shares fell 20 cents, or 2.7 percent, to $7.17 in afternoon trading.