Fitch Boosts HY Metals/Mining Sector Default Rate Outlook Following Alpha Natural (ANRZ) Ch. 11 Filing

The addition of Alpha Natural Resources' (OTCBB: ANRZ) approximately $2.3 billion of bond debt to the default tally drives Fitch Ratings' U.S. high yield metals/mining sector default rate up to 10% for the trailing 12-month period. Today's widely anticipated bankruptcy filing by Alpha is the latest in a series of defaults in the struggling metals/mining sector. Other recent coal bankruptcies include Walter Energy Inc. and Patriot Coal Corp, which filed its second chapter 11 bankruptcy petition on May 12.

The bid price of Alpha's bonds averaged 6%, indicating the current market expectations of poor recovery rates on both unsecured and second lien debt claims. The company has obtained an 18-month debtor-in-possession (DIP) financing totaling up to approximately $692 million.

Fitch believes the sector default rate is likely to further increase in the near term. A probable default is Arch Coal (IDR 'C', RWN), which made a debt exchange offer on July 3 that Fitch classified as a distressed debt exchange (DDE) due to the significant discount to par value. If the offer is successful, Fitch will record a restricted default of the targeted debt issue and downgrade of the IDR to D.

Alpha's filing stemmed from depressed metallurgical coal prices, a secular decline in central Appalachian thermal coal and high debt levels following the 2011 acquisition of Massey Energy. Operating challenges have resulted in negative cash flows from operations as well as debt to EBITDA in excess of 22x for the LTM period ending March 31, 2015. Declining market prices led to an unsustainable capital structure despite efforts to extend maturities and reduce debt via small DDEs. Market challenges included an oversupply of metallurgical coal, competition for steam coal from natural gas, and high operating and environmental costs.

In addition, in late May, Wyoming environmental regulators informed Alpha that the company no longer qualified for the self-bonding program for mine reclamation costs and had 90 days to provide substitute bonding for slightly more than $400 million of obligations. See Fitch Wire: "Tighter Self-Bonding Would Hit Distressed US Coal," dated June 19, 2015 for additional information.

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