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Arch Closes Debt Restructuring

CNX ACI

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Pure coal play, Arch Coal Inc. (ACI - Analyst Report) finalized its 9.875% senior unsecured notes issuance worth $375 million due 2019 and its incremental loan of $250 million valued at 99% of par, to fund general corporate purposes. The term loan will initially have an interest yield of London Interbank Offered Rate (LIBOR) plus 4.50%, subject to a LIBOR floor of 1.25%.

However, the interest rate can slip to LIBOR 4.25% after one year from the original date of loan offered, subject to certain conditions. The annual interest return is expected to be 6% from the secured term loan. With its incremental loan, Arch Coal will witness a reduction in its revolving credit facility to $350 million from $600 million.

It seems that the company periodically engages in issuance activities for the purpose of financing its debt obligations and for meeting other financial requirements. Earlier Arch Coal’s business arm, Arch Western Finance, LLC, effectively redeemed all of its $450 million, 6.75% senior notes due 2013.

Arch Coal’s long-term debt as of September 30, 2012, was $4.5 billion, up from $3.8 billion at the end of December 2011. The company’s debt-to-capital ratio at the end of the third quarter 2012 was 58.5% versus 44.2% ratio of its industry peers. Interest expenses of the company in the third quarter 2012 were $74.3 million which could increase in the following quarters with the current issuance.

Arch Coal’s cash investments and total available liquidity as of September 30, 2012 stand at $1.2 billion and $1.4 billion, respectively. Besides, Arch Coal has secured the means of deleveraging its debt in the event of a turnaround in the coal market.

Moreover, the company has no debt maturities until 2016 with 45% of its outstanding debt being payable beforehand by 2013. However, Arch Coal’s present leverage is higher than the long-term target level.

The Zacks Consensus Estimates for the fourth quarter and full year 2012 are currently pegged at a loss of 12 cents and 31 cents per share, respectively. We expect the winter months to provide some relief from the strong industry headwinds. Considering the pros and cons, Arch Coal for the short term has a Zacks #3 Rank (Hold rating).

Another coal major, CONSOL Energy Inc. (CNX - Analyst Report), however holds a short-term Zacks#4 Rank (Sell rating) in view of the continued softness in the metallurgical coal market worldwide which will weigh down on CONSOL’s profitability.

Based in St. Louis, Missouri, Arch Coal engages in the production and sale of steam and metallurgical coal from surface and underground mines located in the United States.

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