04.12.2012 22:08
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James River Coal Company -- Moody's downgrades James River Coal to Caa1; appends /LD designation

Discounted debt repurchases viewed as a limited default under Moody's definition of default, but not a default under debt agreements

New York, December 04, 2012 -- Moody's Investors Service downgraded James River Coal Company's Corporate Family Rating ("CFR") and Probability of Default Rating ("PDR") to Caa1 from B3, and the senior unsecured notes rating to B3 from B2. The downgrades reflects weakening credit protection metrics as a result of a very difficult environment facing coal producers in Central Appalachia and our view that the company's earnings and cash flow profile will remain challenged in the near-term. The rating outlook remains negative.

"James River is dealing with a combination of cost escalation due to increasing regulatory scrutiny and weak pricing due in part to low natural gas prices. While the company has taken positive actions to reposition its operations and shore up its balance sheet, as described on the third quarter earnings call, we expect external factors will preclude it from maintaining credit measures consistent with the B3 rating level," said Moody's analyst Ben Nelson. Moody's estimates financial leverage near the mid 6 times adjusted debt/EBITDA and interest coverage near zero times EBIT/Interest for the twelve months ended September 30, 2012. Retained cash flow turned negative in the third quarter and could remain negative absent an improvement in pricing or substantive operational adjustment. However, the company reported $171 million of available liquidity at September 30, 2012 comprised of $151 million of balance sheet cash and about $20 million of availability under its revolver, subject to a springing fixed charge coverage ratio if available liquidity falls below $35 million. Moody's believes this liquidity position will help the company navigate through what is expected to be a very challenging operating environment once again in 2013. The Caa1 CFR and SGL-3 short-term liquidity rating assumes that the company will be able to make the necessary operational adjustments to maintain at least $75 million of available liquidity. Moody's believes these adjustments could include a meaningful reduction in production, including shutting in higher-cost mines, if coal prices do not start to evidence signs of improvement over the next six months.

Separately, Moody's appended an /LD designation to James River's Caa1 PDR. This designation reflects the view that recent debt repurchases, though a net positive for James River's credit profile, qualify as a limited default under Moody's definition of default. Moody's definition of default is intended to capture events whereby issuers fail to meet debt service obligations outlined in their original debt agreements. The debt repurchases do not constitute an event of default under any of the company's debt agreements.

Today's actions:

..Issuer: James River Coal Company

.... Corporate Family Rating, Downgraded to Caa1 from B3

.... Probability of Default Rating, Downgraded to Caa1 from B3, /LD designation appended

.... Senior Unsecured Notes due 2019, Downgraded to B3 (LGD3 39%) from B2 (LGD3 34%)

..Outlook, Negative RATING RATIONALE The Caa1 CFR is principally constrained by weak credit protection measures and expectations for negative free cash flow over at least the next few quarters. The rating also reflects a high cost position, significant exposure to the most challenged coal basin, unfavorable impact of increasingly stringent government regulations, and the inherent operating risk and capital intensity of mining. Some operational and product diversity, margin opportunity from thermal coal in the Illinois Basin and high-volatility metallurgical coal in Central Appalachia, and adequate liquidity support the rating. James River is carrying significantly more balance sheet cash and has fewer covenant-related restrictions than at a similarly weak point of the market in late 2008.

The negative outlook reflects our view that without an improvement in market conditions the company could consume a meaningful amount of cash over the next several quarters. Moody's could downgrade the ratings with expectations for financial leverage in excess of 10 times or deterioration in liquidity to below $75 million. Moody's could stabilize the rating outlook or upgrade the rating with expectations for cash margins well in excess of maintenance capital requirements and liquidity sustained well above $100 million.

The principal methodology used in rating James River Coal Company was the Global Mining Industry Methodology published in May 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

James River Coal Company currently operates 36 mines across eight coal mining complexes in Central Appalachia and the Illinois Basin. Headquartered in Richmond, Va., the company generated about $1.2 billion in revenue for the twelve months ended September 30, 2012.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Benjamin Nelson Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Alexandra S. Parker MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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