Alliance Resource Partners L.P. Downgraded To 'BB-'; Outlook Stable

  • U.S.–based coal producer Alliance Resource Partners L.P. (Alliance) is facing difficult operating conditions, which we expect will lead to weaker credit measures in 2020.
  • Management's 2020 outlook outlines a 60% reduction in export volumes compared with last year, which would be compounded by lower seaborne coal prices.
  • Alliance mines about 74% of its coal from the Illinois Basin, which we believe isn't as well positioned to address the export market as Appalachian basin coal.
  • We also cut our Henry Hub natural gas price assumptions for 2020 to $2/mmBtu. As oil and gas prices fall, gas is increasingly substituted for thermal coal. Additionally lower prices adversely affect Alliance's oil and gas–based minerals segment.
  • As a result, we are lowering our issuer credit rating on Alliance to 'BB-' from 'BB+'. We are also lowering the issue-level rating on Alliance's senior unsecured debt to 'BB-' from 'BB'.
  • The stable outlook reflects a scenario where the most acutely detrimental operating conditions will moderate in the second half of the year, resulting in year-end leverage in the 2x – 3x range. Alternatively, even if current conditions persist somewhat longer than expected, leverage would still remain below 4x in that time frame.
FARMERS BRANCH (S&P Global Ratings) March 27, 2020--S&P Global Ratings today 
took the rating actions listed above.

The coal sector has been facing difficult operating conditions for quite some 
time, with multiple waves of headwinds eroding business prospects.
The shale revolution that took off in 2005 has evolved into abundant supplies 
of natural gas, which electricity generation plants can burn more cheaply and 
cleanly than most thermal coals.  This led to a spate of bankruptcies into 
2016 and underscored our view that the domestic thermal coal industry was in 
secular decline.  Coal fired plants were being retired at an increasing pace, 
and it was already generally accepted that building a new plant would be 
uneconomical.  Nevertheless, export markets and metallurgical coal served as 
lifelines as the sector posted a modest recovery following the bankruptcy 
restructurings.  Met coal prices fell 30% in the second half of 2019, thermal 
export markets collapsed causing a significant coal oversupply domestically, 
and a surge of Environmental, Social and Governance (ESG) activism all dimmed 
coal's prospects.  Recently, capital markets have become increasingly 
difficult for coal companies to access, and financial products have become 
more expensive to service in general.  With this as the backdrop, gas prices 
have fallen more than 20% since the beginning of the year, and the coronavirus 
pandemic will certainly slow down the global economy and suppress coal demand. 

The stable outlook reflects a scenario where the most acutely detrimental 
operating conditions will moderate in the second half of the year, resulting 
in year-end leverage in the 2x – 3x range.  Alternatively, even if current 
conditions persist somewhat longer than expected, leverage would still remain 
below 4x with EBITDA margins above 25%. We expect the deteriorating measures 
to be driven chiefly by continued weak demand for coal, particularly from the 
Illinois basin as well as low oil and gas prices that will weigh on the 
minerals segment.

We could lower our rating on Alliance if leverage rises above 4x, and if 
EBITDA margins fall below 25%, particularly if free operating cash flow 
(operating cash flow less capital spending) is negative. This would be 
associated with adjusted EBITDA below $200 million, which could happen if 
production volumes decrease due to extended mandated mining closures because 
of coronavirus-related concerns.

We would consider raising the rating after we have more clarity on near term 
conditions.  This would most likely be after coronavirus-related restrictions 
are lifted, and seaborne coal markets rebalance.  At that time, we would look 
to Alliance's ability to maintain leverage below 3x along with an adequate 
level of liquidity and positive FOCF.
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