Going up in smoke – Arch Coal files for Chapter 11

March 2016 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

In mid January, Arch Coal Inc became the latest US coal mining operation to file for Chapter 11 bankruptcy protection as the country’s energy tastes continue to shift toward natural gas.

According to Arch’s bankruptcy filing, the company intends to trim around $4.5bn off its existing debt pile. It has reached an agreement with the majority of its lenders under its $1.9bn first-lien facility to restructure its debt load. Arch Coal said it had entered into a restructuring support agreement with members of an ad hoc group of lenders that hold more than 50 percent of its first-lien debt. The debt for equity agreement that Arch has struck with its senior lenders will turn control of most of the company over to a group of creditors including Eaton Vance Management Inc, Tennenbaum Capital Partners and Highland Capital Management.

The removal of the significant debt pile would allow Arch to continue to operate. The company, which holds the second largest reserve of coal in the US, said it believes it has sufficient liquidity to continue its normal mining activities and to meet its obligations in the short term. The company, which employs around 4600 people, does not expect to experience any labour issues to surface during the Chapter 11 process. At the time of the filing – 11 January – the company had $600m in cash and short-term investments. The company also expects to receive $275m in debtor-in-possession financing from members of the ad hoc group of lenders. The company’s debtor loan includes a $75m carve-out for environmental reclamation obligations, according to court papers. The company’s court filing listed $5.8bn in assets and debts of $6.5bn.

“After carefully evaluating our options, we determined that implementing these agreements through a court-supervised process represents the best way to solidify our financial position and strengthen our balance sheet,” said the company’s chairman and chief executive, John W. Eaves, in a statement.

A number of US coal majors including Patriot Coal Corp, Alpha Natural Resources Inc. and Walter Energy Inc have endured a turbulent time, with all three filing for bankruptcy protection in 2015. Arch, then, is in good company. In recent years, the US has begun to shift toward cleaner and cheaper natural gas, threatening the future of one of the world’s most polluting forms of energy.

According to data from the World Coal Association, coal’s share of electricity generation in the US fell to 30 percent in April 2015. This fall also coincided with coal being overtaken by gas for the first time. The trials and tribulations of the coal market are not restricted to the US, however. Though coal still generated more than 40 percent of electricity globally last year and is used in the production of 70 percent of the world’s steel, the global industry is faltering in the face of slower demand from China and increased competition from Australian exports.

St Louis based Arch also cited the increasing expense of environmental regulations as having a detrimental effect on the company’s finances. It said the Environmental Protection Agency’s rules had led to the recent closure of more than 400 coal-fired generators. Legislative changes, such as the Clean Power Plan which comes into force in 2022, have also had an impact on coal production and consumption. The Plan requires states to cut carbon emissions by using less coal and more solar, wind and gas power moving forward. Implementation of the Plan could reduce coal demand by 20 percent according to some estimates.

The company’s fortunes have also been adversely affected by the 2011 acquisition of International Coal Group Inc for around $3.4bn. The deal increased Arch’s exposure to thermal coal from Appalachia, which has been hard hit as cheaper thermal coal is mined in the American Midwest.

Given the external pressures placed on its business Arch had undertaken a number of measures designed to cut costs. Production was scaled back, as were wages, prices and the company’s dividend; however, these measures failed to prevent Arch’s slide into bankruptcy.

Richard Summerfield