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Remaining publicly traded coal miners to face a leaner competition

Publiclytraded U.S. coal producers that have managed to amid stricter , cheap natural gasand warmer weather,now face the additional challenge of rivals emerging from restructuring relieved of debt burdens andoperating at lower costs.

Whilethat will toughen competition, analysts say most firms that avoided bankruptcy court so far are likely to continueto avert it at least in the short term.

Moody'ssenior credit analyst Anna Zubets-Anderson told S&P Global MarketIntelligence that remaining publicly traded coal producers are rated by Moody'sas "at risk," but that because their debt loads are less than themajor producers in bankruptcy, most of them are unlikely to file bankruptcythis year.

Beyondan extremely challenging operating environment, she said, they face the prospectof larger competitors emerging from bankruptcy court with a streamlined capitalstructure and a far more manageable debt load. "Part of the problem isthat companies that emerge from Chapter 11 will have smaller debtburdens," she said. "Those that filed will come out in a betterposition to compete," leaving those that haven't filed"disadvantaged."

Zubets-Andersonexpects coal will remain a significant portion of the U.S. electricity mix inyears ahead, "but there's a question of what the will be" and whichproducers can capitalize on the new environment best.

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Alreadythis year, the country's two leading coal producers for bankruptcy courtprotection, while another may have come close recently, even filing a goingconcern notice during prolonged and frequently delayed negotiations withbondholders. Foresight EnergyLP needsapproval from a majority of certain noteholders by May 6 to effectan out-of-court debt restructuring. The partnership had warned that without a deal, it could be forced to seekbankruptcy protection.

NewYork-based Rapid Ratings, a company that measures the financial health ofthousands of public and private companies, recently provided S&P GlobalMarket Intelligence its own assessment of the financial health of major U.S.coal producers. The firm says the rating provides a predictive view of acompany's financial strength, operating efficiency and default probability overthe next 12 months.

Sinceits last analysis ofdata from the third quarter of 2015, Peabody Energy Corp. and have filed forbankruptcy. Rapid Ratings had rated both firms in the "high risk"category for default.

Thefirm's latest data pull for the fourth quarter of 2015 indicates nearly allremaining coal producers are in the "high risk" category. OnlyIllinois Basin producer HalladorEnergy Co. and Alliance Resource Partners LP, which operates in theIllinois Basin and in Appalachia, are rated "low risk or "very lowrisk," respectively.

JamesGellert, CEO of Rapid Ratings, said almost every sector within the broaderenergy market is under scrutiny and despite a recent rebound in the energy bondmarket there remains a "tremendous bear bias towards lower rated energybond issuers." As for coal producers, "it's harder to find silverlinings in coal than anywhere else," he said.

Earningsseason has revealed widerlosses and reduced sales guidance for producers. And with capital marketsall but closed to coal miners, there is little evidence that producers are ableto improve liquidity through asset sales as that market is moribund.

Pointingto a recent sale ofcoal assets by SunCoke EnergyInc., Zubets-Anderson said the current market for coal assets wasso bad that sellers of mines were forced to pay acquirers to take mines andreserves. "The values are negative because of the reclamationobligations," she said.

Sheforecasts domestic thermal coal pricing will improve once more tons come offthe market and utility stockpiles are drawn down. But she is less bullish aboutpricing for coking – or steel making coal – which she expects will remain flatwith seaborne pricing "not looking pretty at all."

According to a ranking of the credit health of U.S.coal producers by S&P Global Market Intelligence, Foresight, coal reservelandowner Natural ResourcePartners LP and Westmoreland Coal Co. rank lowest overall among publiclytraded coal companies not in bankruptcy. At May 2, S&P Global marketIntelligence assigns a market signal probability of default for Foresight at7.4%, at 4.9% for NRP and at 1.8% for Westmoreland.

The highest ranked in overall credit health by S&PGlobal Market Intelligence are Hallador, Alliance and , which operateslongwall mines in Pennsylvania.

Standard & Poor's Ratings Services analyst Chiza Vittasays that beyond Foresight, no other covered U.S. coal producer is at risk inthe near-term for a bankruptcy filing. "Nothing is imminent that we seeright now," he said, adding that remaining producers didn't aggressivelyincrease leverage toinvest in metallurgical coal assets like those in bankruptcy. "They wentinto the downturn with significantly stronger balance sheets," he said.

With just shy of half of all coal in the U.S. coming from acompany that has filed for bankruptcy court protection, it has been difficultto get a handle on what a reorganized domestic industry will look like, accordingto analysts.

"It's taken awhile to get some clarity on how thesecompanies will look when they get out," Vitta said.

S&P Ratings Services analyst Michael Silverberg addedthat the big question involves supply rationalization and how much coalproduction reorganized producers will decide to pull off the market to helpbring it back into balance. "There are a lot of unknowns on how that'sgoing to play out," he said.

Assuming natural gas prices stay in the current range, Vittaestimates that as much as 100 million tons of thermal coal needs to come offthe market before coal pricing can recover, but based on what he is hearingfrom producers that could take some time. "Whilewe think markets will eventually turn, it's tough to say when," he said.

S&P RatingsServices and S&P Global Market Intelligence are owned by S&P Global Inc.