Fitch: Walter Energy Analysis Reveals Potential Value, Headwinds

Fitch Ratings-Chicago/New York - In the wake of a depressed coal market and collapsing earnings of coal companies, Fitch Ratings conducted an analysis on one of the largest pure-play North American metallurgical coal producers, Walter Energy Inc. The report summarizes our view of the credit profile and highlights critical issues surrounding the company’s operations and focuses on the company’s response to a weak global metallurgical coal market.

After a massive drop in hard coking coal benchmark prices from $235 per tonne (/t) in the third quarter of 2012 to $172/t in the second quarter of 2013, prices have continued to fall, at $143/t as of the first quarter of 2014.

Despite a slight increase in the fourth quarter of 2013, Fitch does not expect a meaningful near-term rebound as demand is still feeble and Australian supply is expanding.

We believe Walter may struggle with upcoming covenant compliance and 2015 debt repayment without a material rebound in coal prices. Fitch estimates a benchmark in at least the mid-$160s/t is needed for the company to be free cash flow positive. Even then, it will have to contend with the 8.0x senior secured leverage covenant in June 30, 2014.

That said, we believe potential value still exists. The company’s value is supported by its solid asset base of high-quality coal reserves. As of the end of 2012, Walter had 358 million tonnes (mt) of proven coal reserves, including 192 mt in Alabama, 40 mt in West Virginia and 124 mt in Canada. The company has also been aggressive in its cost-cutting.

For detailed analysis, see the special report, “Walter Energy, Inc.,” available on Fitch’s website www.fitchratings.com.