DEBTWIRE BROADCAST: ARCH COAL VALUATION AND LEGAL ISSUES UP FOR DISCUSSION AT DEBTWIRE ROUNDTABLE Debtwire’s team of journalists and analysts will recap Arch’s first day hearing and explore a variety of topics, including plan and valuation issues, unsecured bondholders’ legal options and game theory, as well as the company’s reclamation burden. | 13 January 2016
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DEBTWIRE BROADCAST: ARCH COAL VALUATION AND LEGAL ISSUES UP FOR DISCUSSION AT DEBTWIRE ROUNDTABLE January 2016 Debtwire’s team of journalists and analysts.
THE DESCENT Arch’s Chapter 11 filing was precipitated by the collapse in coal prices, alongside low natural gas prices. Management takes steps to right-size the balance sheet by selling assets, amending covenants and swapping unsecured debt. The proposed debt exchange stirs a war of letters, followed by litigation, between bondholders, first lien lenders and the company. Arch cancels the debt exchange, and three months later files with a USD 275m DIP and a plan backed by lenders. 3
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DEBTWIRE BROADCAST:ARCH COAL VALUATION AND LEGAL ISSUES UP FOR DISCUSSION AT DEBTWIRE ROUNDTABLE
Debtwire’s team of journalists and analysts will recap Arch’s first day hearing and explore a variety of topics, including plan and valuation issues, unsecured bondholders’ legal options and game theory, as well as the company’s reclamation burden. | 13 January 2016
1) The DIP Term Loan will mature on the earliest of a) 31 January 2017, b) effectiveness of a Plan of Reorganization, c) appointment of a trustee or d) sale of substantially all assets pursuant to Section 363. The DIP Term Loan is subject to a 1.00% LIBOR floor.
2) The New First Lien Debt will bear interest at Libor+ 900bps and is subject to a 1% Libor floor. The loan will mature in five years.3) The term loan is subject to a 1.25% floor. 4) As of the petition date, USD 178m in letters of credit were outstanding under the A/R Securitization Facility. The L/Cs outstanding are secured by eligible accounts receivable
and USD 97m of cash collateral. Arch Receivable Company, LLC, a special purpose, bankruptcy-remote indirect subsidiary of Arch, is party to the A/R securitization facility.5) We assume the company has USD 386m in total cash at emergence based on the nine month restructuring scenario outlined in a lender presentation.6) As an estimate of reorganized Arch's equity value, we use the market value of the second lien bonds and unsecured bonds as a proxy.Sources: SEC Filings, Court Filings, Markit, MarketAxess.
SOURCES & USESUSD m, where applicable Company ProvidedFirst Lien Distribution 9-month caseFirst Lien Debt 1,886 Distribution (%) 22.5%Total Distribution 424 Less: December Interest Payment (30)Less: Adequate Protection Payment (88)Remaining Distribution 306 Less: Take-Back Paper (306)Assumed Cash Distribution -Sources & Uses Sources: Cash Balance (11 January 2016) 654 DIP Drawn 275 Total 929 Uses: December Interest Payment -Adequate Protection Payments 88 Bankruptcy Cash Burn (excluding Adequate Protection Payments) 130 Other Contingency 50 Cash Distribution to First Lien -Minimum Cash 375 DIP Paydown 275 Excess Cash at Emergence 11 Total Uses 929 Minimum Cash Calculation: Working Capital Fluctuations 50 Business Volatility 225 Other Contingency 100 Total 375 Capital Structure: Rolled DIP -Take-back Paper 306 Total Debt 306 Less: estimated cash at emergence (11)Total Net Debt 296 Memo: Total Cash at Emergence 386
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FINANCIAL ANALYSIS: REGIONAL IS
REGIONIAL INCOME STATEMENTSUSD m 1Q16 2Q16 3Q16 4Q16 2016 2017Powder River Basin Revenues: Coal sales 313 307 314 318 1,251 1,426 Cost and Expenses: Cost of coal sales 274 268 274 269 1,085 1,219 Depreciation, depletion & amortization 43 42 42 40 166 166 Other 0 0 0 0 1 1 Operating expenses 317 310 315 310 1,252 1,386 Other operating income: Income (loss) from equity investments 0 0 0 0 0 0 Other revenues (1) (1) (1) (0) (3) 0 Income (loss) from operations (6) (4) (3) 8 (4) 39 EBITDA 37 38 39 49 162 206 Appalachia Revenues: Coal Sales 183 175 172 175 705 739 Cost and Expenses: Cost of coal sales 171 166 161 163 660 655 Depreciation, depletion & amortization 27 25 25 24 101 92 Other 0 0 0 0 2 2 Operating expenses 198 191 186 187 763 749 Other operating income: Income (loss) from equity investments 0 0 0 0 0 0 Other Revenues 1 2 1 2 5 4 Income (loss) from operations (14) (14) (13) (11) (53) (6)EBITDA 13 11 12 12 48 86 Bituminous Thermal Revenues: Coal Sales 43 52 54 58 208 230 Cost and Expenses: Cost of coal sales 39 37 42 39 156 176 Depreciation, depletion & amortization 8 9 8 9 34 37 Other 0 0 0 0 0 0 Operating expenses 46 46 50 48 190 213 Other operating income: Income (loss) from equity investments 0 0 0 0 0 0 Other Revenues 1 1 1 1 3 3 Income (loss) from operations (2) 7 5 10 20 19 EBITDA 5 16 13 20 54 57
Source: SEC filings.
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FINANCIAL ANALYSIS: MGT. PROJECTIONS
PRELIMINARY BUSINESS PLANUSD m 2015F 2016F 2017F
Coal Sales 2,464 2,164 2,394
Cost of Coal Sales (2,096) (1,926) (2,076)
Gross Profit 368 237 318
Margin 15% 11% 13%
SG&A (102) (99) (101)
Other Operating (Expenses)/Income 1 (21) (65) (68)
EBITDA 244 73 149
Margin 10% 3% 6%
Less: Capex (Including Investments in JVs) (132) (169) (150)
1) Includes liquidated damages expense of USD 56m in 2015, USD 59m in 2016 and USD 62m in 2017.2) Primarily comprised of cash posted as collateral (USD 94m), taxes, accruals (pension, benefits, workers comp, etc.), equity investments, interest income and professional fees.Source: SEC Filings.
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VALUATION INSIGHTS: ESTIMATED RECOVERIES
ESTIMATED RECOVERIESUSD m, where applicable Principal Value of
RecoveryEstimated Recovery
First Lien 1,886 717 38.0%
Second Lien 350 1 0.3%
Unsecured Debt 2,875 9 0.3%
1) We assume the company has a neglibile cash balance at 2017 year-end.2) We discount the equity at 16%.Sources: SEC filings, Debtwire Analytics.
REORG EQUITY VALUEUSD m, where applicable 2017 EBITDA 149 Multiple 4.5xReorganized Arch EV (2017) 671 New first lien debt 327 Equity value 1 344 Discounted equity value 2 256
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COURT CASE
RSA: Does anyone fight it?
Post-petition Financing: DIP and Securitization Program.
Union Issues: No 1113/1114, but litigation over Patriot withdrawal liability.
Potential reclamation obligation issues.
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Q&A
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