Walter Energy (WLT) Corp. Rating Raised to 'CCC-' by S&P; Outlook Negative

Standard & Poor's Ratings Services said today it raised its corporate credit rating on Walter Energy (NYSE: WLT) to 'CCC-' from 'D'. The outlook is negative.

We also raised our rating on the company's first-lien debt to 'CCC' from 'D'. At the same time, we raised our rating on the company's second-lien debt and senior unsecured debt to 'C' from 'D'. The recovery rating on the company's senior secured debt is '2', which indicates our expectation for recovery at the lower half of the substantial (70% to 90%) recovery range. The recovery rating on the second-lien debt and the senior unsecured obligations is '6', which indicates our expectation for negligible (0% to 10%) recovery.

We raised the ratings on Birmingham, Ala.-based coal miner Walter Energy after the company announced it would pay approximately $62 million in aggregate interest payments on its 9.5% senior secured notes due 2019 and its 8.5% senior notes due 2021. The company had previously exercised the 30-day grace period under the indentures governing the notes. In our opinion, the company has an unsustainable debt level, and we anticipate a default-triggering event to occur unless its debt is restructured in the next six months. Cash and investments totaled approximately $435 million on March 31, 2015.

The negative outlook reflects our expectation that weak met coal market conditions will persist and a default-triggering event is highly likely in the next six months. We also expect very weak credit measures in 2015, with debt leverage above 20x and EBITDA interest coverage of less than 1x in 2015.

We believe the company's capital structure is unsustainable absent improvement in met coal prices and debt restructuring. We could lower our rating if the company pursues a restructuring default, distressed exchange, or redemption within six months.

We consider an upgrade within the next year to be improbable based on the current weak met coal market conditions. An upgrade would be likely if the company returns to a positive free operating cash flow (cash from operations less capital spending) while maintaining adequate liquidity. We view this as a longer-term prospect barring a transformative change in market conditions or the capital structure.

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