The rating agency says it believes metallurgical coal prices, which fell sharply in 2012, are likely to remain low in 2013 because of slower global steel production.
It says the high costs at its Canadian mines will hurt it, too.
Worryingly for the US-based coal producer, S&P reckons there is the potential for another downgrade if the global economic conditions weaken further.
This, it reasons, could cause the company to maintain its leverage above the five times EBITDA mark and strain its liquidity.
“This is well above our previous expectations and indicative of an ‘aggressive’ financial risk profile,” S&P says in its research note.
“These conditions [high costs and low coal prices] caused the company to write down all $1.1 billion of goodwill related to its 2011 acquisition of Western Coal Corp and negotiate more flexibility under restrictive leverage covenants governing its revolving credit facility.
“We are maintaining our negative outlook on the company given difficult market conditions and the company’s significant capital expenditure needs.”
S&P also points to the fact the company has a high reliance on a single southern Appalachian mining complex for most of its operating income.
Much of the company’s high debt level comes as a result of its $3.3 billion purchase of Western Coal Corp.
The fourth-quarter benchmark price for met coal has fallen to $170 per metric tonne, with spot prices even lower.
“Our estimates for 2013 assume that benchmark prices remain below $200/t and that Walter Energy’s production climbs above 15 million tons,” S&P says.
“Based on these assumptions we expect about $600 million of EBITDA with leverage near the middle of the 4x-5x range.
“We also expect funds from operation to debt to be near the lower end of the 12-20% range through 2013.
“Both ranges are consistent with an aggressive risk financial profile.”
S&P expects Walter to make $350 million cash from its operations for 2012 and $400-$450 million in 2013.