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Standard & Poor's Ratings Services
said today it lowered its corporate credit rating on Birmingham, Ala.-based
Walter Energy Inc.
to 'B' from 'B+'. The outlook is stable.
At the same time, we assigned our 'BB-' issue-level rating (two notches higher
than the corporate credit rating) on the company's proposed senior secured
bank debt. Our recovery rating on the secured bank debt is '1', indicating our
expectation for very high recovery (90% to 100%) in the event of a payment
default. We are also lowering the rating on the existing unsecured debt to
'B-' from 'B'. The recovery rating remains '5' indicating our expectation of a
modest (10% to 30%) recovery in the event of a payment default.
"The downgrade reflects our expectation that Walter Energy's leverage will
climb to about 8x in 2013 and remain above 5x in 2014, with funds from
operations to total debt remaining below 15% in both years, as the company
continues to face low metallurgical coal prices that have depressed operating
performance," said Standard & Poor's credit analyst Marie Shmaruk.
Prices have fallen significantly in the wake of lower demand in Europe,
slowing economic activity in China, and lack of operating disruptions,
particularly in Australia where floods in 2011 caused prices to spike. This
has resulted in significantly lower-than-anticipated EBITDA and credit
measures that are well outside of our previous expectation and, in our view,
more in line with the 'B' rating and a "highly leveraged" financial risk
profile. The stable outlook reflects the improvement in liquidity stemming
from extending maturities and lack of maintenance covenants in the new term
loan. Our ratings and outlook reflect an additional $500 million of unsecured
debt concurrent with the closing of the proposed bank facilities.
Our ratings on Walter Energy reflect our view of the company's "weak" business
risk and its "highly leveraged" financial risk profile. Key risks include
continued weakness in the company's key European markets, the company's high
reliance on a single Southern Appalachian mining complex for most of its
operating income, and elevated debt levels related to the company's $3.3
billion acquisition of Western Coal Corp. Still, we maintain our view that
Walter Energy's coal reserves are of a very high quality and that its mining
costs are low compared with many of its peers. Therefore, we expect its credit
measures to improve when market conditions and met coal prices rebound, though
the timing of a recovery is uncertain.
The stable outlook reflects our view that despite our expectation that Walter
Energy's leverage is likely to climb to about 8x EBITDA in 2013 and is likely
to remain at or above 5x into 2014, the liquidity benefits of the proposed
transactions underpin the rating during the current difficult market
conditions.
We could lower our rating if prices remain low and liquidity falls below $300
million and we believe leverage will continue to be sustained well above 5x,
with funds from operations to total debt remaining below 15%. This could occur
if met coal prices continue to deteriorate because steel production remains
under pressure reflecting weaker-than-expected global economic conditions.
We could raise the ratings if Walter is able to maintain its leverage below
5x. This could occur if met coal prices improve and the company is able to
maintain current production levels in Alabama at costs of about $100 per ton
while increasing production levels and lowering costs in Canada.
Walter Energy mines met coal, which is used primarily in steelmaking. We
expect that Walter Energy will use the proposed term loan proceeds and a
concurrent issuance of $500 million of senior unsecured debt to repay its
existing term loans.
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