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DEBTWIRE BROADCAST:

ARCH COAL VALUATION AND LEGAL ISSUES UP FOR DISCUSSION

AT DEBTWIRE ROUNDTABLE

Debtwire’s team of journalists and analysts will recap Arch’s first day hearing and explore a variety of topics, including plan and valuation issues, unsecured bondholders’ legal options and game theory, as well as the company’s reclamation burden. | 13 January 2016

AGENDA

1.

Opening Remarks: Kate Marino, Deputy Editor

Kate.Marino@Debtwire.com

2.

The Descent: Madalina Iacob, Associate Editor & Energy Reporter

Madalina.Iacob@Debtwire.com

3.

First Day Hearing: Maria Chutchian, Court Reporter

Maria.Chutchian@Debtwire.com

4.

Financial Analysis: Thomas Rorick, Distressed Analyst

Thomas.Rorick@Debtwire.com

5.

Court Case: Joshua Friedman, Legal Analyst

Joshua.Friedman@Debtwire.com

6.

Q & A

2

THE DESCENT

 Arch’s Chapter 11 filing was precipitated by the collapse in coal prices, alongside low natural gas prices.

 Management takes steps to right-size the balance sheet by selling assets, amending covenants and swapping unsecured debt.

 The proposed debt exchange stirs a war of letters, followed by litigation, between bondholders, first lien lenders and the company.

 Arch cancels the debt exchange, and three months later files with a USD 275m DIP and a plan backed by lenders.

3

FIRST DAY HEARING

Unsecured and second lien holders unsatisfied with RSA

DIP issues

Judge Rendlen oversees his largest Chapter 11 case

4

FINANCIAL ANALYSIS: ADJUSTED CAPITAL STRUCTURE

USD m, where applicable

DIP Term Loan

1

New First Lien Debt 2

First lien term loan 3

A/R securitization facility

4

Second lien notes

Total secured debt

Senior unsecured notes

Senior unsecured notes

Senior unsecured notes

Senior unsecured notes

Total debt

Less: cash and cash equivalents 5

Net debt

Equity market capitalization 6

Enterprise value

2016P EBITDA

Coupon

L+ 9.00%

L+ 9.00%

L+ 5.00%

-

8.00%

7.00%

9.875%

7.25%

7.25%

73

PRO FORMA ADJUSTED CAPITAL STRUCTURE

Face Amount Market Amount

375

500

1,000

5,289

591

4,698

9

4,707

275

-

1,886

178

350

2,414

1,000

4

3

8

911

591

320

9

328

275

-

704

178

7

889

8

Adj.

(275)

327

(1,886)

-

(350)

(1,910)

(1,000)

(375)

(500)

(1,000)

(4,785)

(205)

247

Pro Forma

Face Amount

0

0

0

505

386

119

256

374

0

327

0

178

0

505

0

Price

-

2

-

1

-

-

37

1

1

1

Maturity

22 Sep 2016

Five Years

16 May 2018

8 Dec 2017

15 Jan 2019

15 Jun 2019

15 Jun 2019

1 Oct 2020

15 Jun 2021

2016PF

Face Leverage

-

4.5x

-

6.9x

-

-

-

-

-

6.9x

1.6x

5.1x

Obligations:

Asset Retirement Obligations

Worker's Comp

Other

Total

OBLIGATIONS (USD m)

Surety Bonds

681

20

58

758

L/Cs

41

112

7

160

Cash

8

11

-

19

1) The DIP Term Loan will mature on the earliest of a) 31 January 2017, b) effectiveness of a Plan of Reorganization, c) appointment of a trustee or d) sale of substantially all assets pursuant to Section 363. The DIP Term Loan is subject to a 1.00% LIBOR floor.

2) The New First Lien Debt will bear interest at Libor+ 900bps and is subject to a 1% Libor floor. The loan will mature in five years.

3) The term loan is subject to a 1.25% floor.

4) As of the petition date, USD 178m in letters of credit were outstanding under the A/R Securitization Facility. The L/Cs outstanding are secured by eligible accounts receivable and USD 97m of cash collateral. Arch Receivable Company, LLC, a special purpose, bankruptcy-remote indirect subsidiary of Arch, is party to the A/R securitization facility.

5) We assume the company has USD 386m in total cash at emergence based on the nine month restructuring scenario outlined in a lender presentation.

6) As an estimate of reorganized Arch's equity value, we use the market value of the second lien bonds and unsecured bonds as a proxy.

Sources: SEC Filings, Court Filings, Markit, MarketAxess.

5

FINANCIAL ANALYSIS: INTERIM CASH BUDGET

USD m

CASH BUDGET (USDm)

Pre-

Petition

Post-Petition

8 Jan 15 Jan 22 Jan 29 Jan 5 Feb 12 Feb 19 Feb 26 Feb 4 Mar 11 Mar 18 Mar 25 Mar 1 Apr

Receipts:

Total Receipts

Operating Disbursements:

20

Payroll & Benefits (26)

Other Operating Disbursements (21)

Cash Flow from Operations

Capex

Cash Interest & Bank Fees

(27)

(1)

(0)

7 Other

Total Net Cash Flow

Beginning Cash

(22)

620

(22) Net Cash Flow

Change in O/S check float

Ending Cash

(7)

591

6 Derivative Acct. Availability

Available DIP

Available Liquidity

Liquidity Covenant

Cushion

-

597

-

591

50

13

591

13

-

604

6

(8)

(14)

28

(1)

(14)

0

275

885

575

310

31

(14)

604

(14)

-

591

6

(15)

(32)

(16)

(1)

-

3

275

872

575

297

39

(3)

591

(3)

-

588

6

(6)

(33)

(1)

(1)

(0)

(1)

275

869

575

294

41

(23)

588

(23)

-

566

6

(15)

(49)

(23)

(1)

(1)

2

275

847

575

272

37

6

566

6

-

571

6

(7)

(22)

8

(1)

-

(2)

275

852

575

277

43

(0)

571

(0)

-

571

6

(15)

(25)

3

(1)

-

(3)

275

852

575

277

44

(2)

571

(2)

-

569

6

(7)

(37)

0

(1)

(0)

(1)

275

850

575

275

50

(20)

569

(20)

-

549

6

(15)

(48)

(13)

(1)

(1)

(6)

275

830

575

255

47

16

549

16

-

565

6

(7)

(20)

20

(1)

-

(3)

275

847

575

272

57

10

565

10

-

575

6

(15)

(24)

18

(1)

-

(8)

275

856

575

281

46

8

575

8

-

583

6

(7)

(27)

12

(1)

(0)

(3)

275

864

575

289

46

(15)

(54)

(23)

(1)

(32)

(5)

275

804

575

229

(60)

583

(60)

-

523

6

Total

549

(90)

620

(90)

(7)

523

6

(156)

(406)

(12)

(9)

(49)

(19)

275

804

575

229

Source: Court filings.

6

FINANCIAL ANALYSIS: SOURCES & USES

Source: SEC filings.

SOURCES & USES

USD m, where applicable

First Lien Distribution

First Lien Debt

Distribution (%)

Total Distribution

Less: December Interest Payment

Less: Adequate Protection Payment

Remaining Distribution

Less: Take-Back Paper

Assumed Cash Distribution

Sources & Uses

Sources:

Cash Balance (11 January 2016)

DIP Drawn

Total

Uses:

December Interest Payment

Adequate Protection Payments

Bankruptcy Cash Burn (excluding Adequate Protection Payments)

Other Contingency

Cash Distribution to First Lien

Minimum Cash

DIP Paydown

Excess Cash at Emergence

Total Uses

Minimum Cash Calculation:

Working Capital Fluctuations

Business Volatility

Other Contingency

Total

Capital Structure:

Rolled DIP

Take-back Paper

Total Debt

Less: estimated cash at emergence

Total Net Debt

Memo: Total Cash at Emergence

Company Provided

9-month case

1,886

22.5%

424

(30)

(88)

306

(306)

-

654

275

929

-

88

130

50

-

375

275

11

929

50

225

100

375

-

306

306

(11)

296

386

7

USD m

Powder River Basin

Revenues:

Coal sales

Cost and Expenses:

Cost of coal sales

Depreciation, depletion & amortization

Other

Operating expenses

Other operating income:

Income (loss) from equity investments

Other revenues

Income (loss) from operations

EBITDA

Appalachia

Revenues:

Coal Sales

Cost and Expenses:

Cost of coal sales

Depreciation, depletion & amortization

Other

Operating expenses

Other operating income:

Income (loss) from equity investments

Other Revenues

Income (loss) from operations

EBITDA

Bituminous Thermal

Revenues:

Coal Sales

Cost and Expenses:

Cost of coal sales

Depreciation, depletion & amortization

Other

Operating expenses

Other operating income:

Income (loss) from equity investments

Other Revenues

Income (loss) from operations

EBITDA

Source: SEC filings.

FINANCIAL ANALYSIS: REGIONAL IS

REGIONIAL INCOME STATEMENTS

1Q16 2Q16 3Q16

183

171

27

0

198

0

1

(14)

13

313

274

43

0

317

0

(1)

(6)

37

43

39

8

0

46

0

1

(2)

5

175

166

25

0

191

0

2

(14)

11

307

268

42

0

310

0

(1)

(4)

38

52

37

9

0

46

0

1

7

16

172

161

25

0

186

0

1

(13)

12

314

274

42

0

315

0

(1)

(3)

39

54

42

8

0

50

0

1

5

13

4Q16

175

163

24

0

187

0

2

(11)

12

318

269

40

0

310

0

(0)

8

49

58

39

9

0

48

0

1

10

20

2017

739

655

92

2

749

0

4

(6)

86

1,426

1,219

166

1

1,386

0

0

39

206

230

176

37

0

213

0

3

19

57

8

2016

705

660

101

2

763

0

5

(53)

48

1,251

1,085

166

1

1,252

0

(3)

(4)

162

208

156

34

0

190

0

3

20

54

FINANCIAL ANALYSIS: MGT. PROJECTIONS

USD m

Coal Sales

Cost of Coal Sales

Gross Profit

Margin

SG&A

Other Operating (Expenses)/Income 1

EBITDA

Margin

Less: Capex (Including Investments in JVs)

Plus/Less: Change in Net Working Capital

Plus/Less: Other

Unlevered Free Cash Flow

Plus/Less: Illustrative Restructuring Initiatives

Adjusted Unlevered Free Cash Flow

PRELIMINARY BUSINESS PLAN

2015F

2,464

(2,096)

368

15%

(102)

(21)

244

10%

(132)

18

(168) 2

(38)

(20)

(58)

2016F

2,164

(1,926)

73

3%

(169)

52

237

11%

(99)

(65)

(1)

(45)

(32)

(77)

2017F

2,394

(2,076)

149

6%

(150)

28

318

13%

(101)

(68)

14

41

31

72

1) Includes liquidated damages expense of USD 56m in 2015, USD 59m in 2016 and USD 62m in 2017.

2) Primarily comprised of cash posted as collateral (USD 94m), taxes, accruals (pension, benefits, workers comp, etc.), equity investments, interest income and professional fees.

Source: SEC Filings.

9

VALUATION INSIGHTS: ESTIMATED RECOVERIES

USD m, where applicable

2017 EBITDA

Multiple

Reorganized Arch EV (2017)

New first lien debt

Equity value

1

Discounted equity value

2

REORG EQUITY VALUE

USD m, where applicable

First Lien

ESTIMATED RECOVERIES

Principal

Value of

Recovery

1,886 717

Second Lien

Unsecured Debt

350

2,875

1

9

1) We assume the company has a neglibile cash balance at 2017 year-end.

2) We discount the equity at 16%.

Sources: SEC filings, Debtwire Analytics.

149

4.5x

671

327

344

256

Estimated

Recovery

38.0%

0.3%

0.3%

10

COURT CASE

 RSA: Does anyone fight it?

 Post-petition Financing: DIP and Securitization Program.

 Union Issues: No 1113/1114, but litigation over Patriot withdrawal liability.

 Potential reclamation obligation issues.

11

12

DISCLAIMER

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