Fitch Comments on Patriot Coal's Ch. 11 Filing; Arch Coal (ACI), Walter Energy (WLT) Have 'Significant' Default Risk

Patriot Coal Corp.'s second Chapter 11 filing is a function of a challenging coal market and high production costs, according to Fitch Ratings.

The company Tuesday filed bankruptcy in a so-called Chapter 22 after emerging from its first Chapter 11 reorganization process in Dec. 2013. Patriot is negotiating to sell all assets and considering other strategic alternatives to maximize value for assets in the current case.

Patriot has struggled as a producer located in the higher cost Appalachian region. Demand for steam coal has declined while environmental regulations are increasing, and default activity among weaker producers is increasing. Xinergy Ltd. filed bankruptcy on April 6, Alpha Natural Resources completed a distressed debt exchange on April 1 that Fitch classified as a default in its High Yield Default Index, and Winsway Enterprises Holdings Ltd. did not make an interest payment within a 30-day grace period that expired on May 8.

Patriot's secured term loan B due 2018 is trading at a discount. The $250 million loan was bid at 67 Monday, according to pricing data from Thomson Reuters LPC. The significant discount to original par value indicates the market expects that distributions to holders will likely provide less than full recoveries. Secured lenders received full repayment on their claims in the company's first bankruptcy reorganization. The company has obtained a commitment for $100 million in debtor in possession financing from its existing lender group to support its continued operations this time.

Fitch expects more coal producer defaults to follow the current crop of defaults based on the results of a screen of high yield bonds in the coal mining sector with deeply discounted trading prices. Coal companies with significant default risk include Arch Coal (NYSE: ACI) and Walter Energy (NYSE: WLT).

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