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S&P lowers outlook for Arch Coal

NEW YORK (AP) -- Standard & Poor's Ratings Services on Wednesday cut its outlook for Arch Coal Inc. to "Negative" from "Stable," citing the company's plans to take on an additional $600 million in debt.

S&P also affirmed its ratings for the St. Louis-based coal producer, including its "B+" corporate credit rating, and assigned a "B-" rating with a recovery rating of "6'' to the company's proposed $350 million senior unsecured notes due 2019. The "6'' recovery rating means that S&P expects investors to recoup between zero and 10 percent of their investments if the company defaults.

The additional $250 million of debt is coming from an existing senior secured term loan due 2018 that is rated "BB" with a recovery rating of "1." The "1'' rating indicates that investors could expect to recoup between 90 percent and 100 percent of their investments if the company defaults on that debt.

The ratings service said that while the additional debt will dramatically increase Arch's leverage, hurting its credit profile, the cash proceeds will help the company withstand tough market conditions if they continue for another year or two.

The coal industry has been battered this year 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.

S&P's move comes after Fitch Ratings on Tuesday cut its issuer default rating for Arch to "B'' from "B+," citing the proposed increase in debt and an oversupply of certain kinds of coal on the market.

Fitch also lowered its rating for Arch'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.

Arch shares fell 31 cents, or 4.4 percent, to $6.72 in afternoon trading. Its shares have traded in a 52-week range of $5.16 to $17.19.