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Arch Coal files for bankruptcy protection

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World Coal,

US coal company, Arch Coal, has filed for Chapter 11 bankruptcy under an agreement with lenders holding more than 50% of its first lien debt to significantly restructure the company’s debt.

“Today’s announcement represents another significant step in our ongoing efforts to position the company for long-term success,” said Arch’s Chairman and CEO, John Eaves, in a statement.

Under the agreement, the lenders will provide US$275 million of so-called “debtor-in-possession” financing to support the company’s reorganization, which aims to eliminate more than US$4.5 billion in debt from its balance sheet.

The decision to enter bankruptcy protection has been expected with the company warning in its 3Q15 results that it would be unable to continue to service its debt load in current market conditions. The company also delayed US$90 million of interest payments in mid-December, saying it was holding discussions with creditors on ways to restructure its balance sheet.

“After carefully evaluating our options, we determined that implementing these agreements through a court-supervised process represents the best way to solidify our financial position and strengthen our balance sheet,” continued Eaves.

The company expects mining operations and customer shipments to continue uninterrupted throughout the reorganization process and will continue to pay wages and provide healthcare and other benefits without interruption.

The US coal sector has been hit by falling demand for its product on the back of low gas prices and tightening regulations. The US Energy Information Administration (EIA) recently reported that gas-fired electricity generation surpassed that from coal-fired power plants for the first time in history in April 2015, before repeating the feat from July to October 2015 – the latest monthly data available.

As a result, the EIA reckons that coal demand from the electricity sector is expected to be 764 million t in 2015 – the lowest level since 1988. US coal exports have also been in freefall, dropping an expected 21% y/y in 2015 as US producers struggle to compete with cheaper coal from Australia and Indonesia.

“Arch's bankruptcy acknowledges reality," said Tom Sanzillo, Director of Finance at the Institute for Energy Economics and Financial Analysis. "Like most of the coal industry, its outlook continues to be unrealistic. It cannot continue to operate zombie mines and chase the ghosts of past markets."

"The problem for Arch is not only debt reorganisation but what kind of company Arch will be going forward. Currently, there are too many coal companies mining too much coal in a declining market where prices are too low to support operations. Given the absence of a plan to address operations including how many coal mines must close, future customers in the US and abroad, and a realistic assessment of coal prices, no bankruptcy plan should be approved," Sanzillo concluded.

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