Arch Coal’s turnaround plan confirmed by US court

November 2016 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

In mid September, US coal miner Arch Coal won court approval for a plan to eliminate $4.7bn worth of debt from its balance sheet, clearing the path for the company to emerge from bankruptcy in early October.

Arch Coal, the US’ second largest coal producer, filed for Chapter 11 protection in January citing debts of around $6.3bn, becoming one of the most high profile casualties of the considerable volatility experienced in the commodities space in recent years. While Arch’s heavy debt load, which was taken on before coal prices fell, was already cumbersome, once the price of coal began its precipitous fall the company’s fate was sealed.

However, now that the company’s restructuring plan has won the approval of the US Bankruptcy Court in St. Louis, Arch is expected to emerge from bankruptcy protection in October under the majority control of the company’s senior lenders. According to court documents, the company’s senior creditors, owed roughly $1.9bn, will receive cash, another $326.5m issued in new senior debt, and about 94 percent of the common shares in the NewCo after bankruptcy. Arch’s unsecured creditors will receive the other 6 percent of the common equity.

Under the terms of Arch Coal’s restructuring agreement, the company’s unsecured creditors, including bondholders, will get $30m in cash and 6 percent of the company’s new shares.

Bondholders will also get to choose between warrants to buy up to 12 percent of Arch’s new common shares or $25m in additional cash. All of the stock distributions are subject to dilution by the warrants and a management incentive programme. Furthermore, according to court documentation the company’s existing shareholders will be wiped out under the plan.

“The Court’s confirmation of our plan is the final legal step in our successful financial restructuring. We will emerge as a strong, well-positioned natural resource company with a compelling plan for value creation. We have accomplished a great deal through the restructuring process and are confident that we have established a solid foundation for long-term success, built on our strong metallurgical and thermal franchises and our core commitment to safety and environmental excellence. We thank our customers and vendors for their important support, as well as our employees for their great dedication to Arch,” said Arch Coal’s chief executive John W. Eaves in a statement.

“We appreciate the cooperation of our lenders and creditors, as well as their advisors, who worked constructively with us to complete Arch’s financial restructuring in an expeditious and efficient manner,” Mr Eaves added.

The restructuring is the result of lengthy settlement talks with the company’s junior creditors, who had threatened litigation in connection with Arch’s prior restructuring efforts. However, the company finally won the support of the overwhelming majority of its creditors. Indeed, more than 96 percent of Arch Coal’s creditors who cast ballots on the plan voted in favour of the deal. However, the restructuring agreement was opposed by the federal bankruptcy watchdog. Regardless of this disagreement the removal of nearly $5bn worth of debt will allow Arch Coal to emerge as a “lean, mean, fighting machine for the coming era, which will remain challenging and complicated for the US coal industry”, according to the company’s bankruptcy lawyer Marshall Huebner.

Prior to the company’s bankruptcy filing, Arch posted $485m in self-bonds to pay for mine cleanup and remediation costs in Wyoming. Those bonds are not generally insured, so bankruptcy can pose a challenge. It appears as though Arch will have to replace those bonds with insured bonds after exiting bankruptcy protection. According to the reorganisation plan, Arch was required to replace its self-bonds within 15 days of the bankruptcy exit plan becoming effective, in order to win court approval of the restructuring. The company had previously resisted calls for it to replace the bonds; however, there has been a renewed push to crack down on self-bonding following the Chapter 11 filings of some of the US’ largest coal companies. Indeed, US coal watchdog the Office of Surface Mining and Reclamation Enforcement has asked state regulators to get tough on companies self-bonding.

Moving forward, the newly reorganised company’s prospects appear to be a lot brighter given the firm’s status as one of the world’s top coal producers for the global steel and power generation industries. Indeed, Arch has a worldwide network of customers.

Richard Summerfield