Financially-strapped coal producer Walter Energy (OTC PINK: WLTG) announced July 15 that it has entered into an agreement with certain of its senior lenders on the material terms of a restructuring that requires it and its U.S. subsidiaries to file for relief under chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court for the Northern District of Alabama.
Walter Energy’s non-U.S. operations, including those in western Canada and the United Kingdom, are not included in the filings. The operations in western Canada were idled last year, leading to some of the company’s financial problems.
“This restructuring plan provides a roadmap for Walter Energy to establish a sustainable capital structure, make further changes to operational cost drivers, and ensure that the Company can continue to operate safely and competitively in the years ahead,” said Walt Scheller, Chief Executive Officer. “With the support of our key senior lenders, we will use this process to pursue the best possible outcome on behalf of all of our stakeholders, including our employees and our communities. In the face of ongoing depressed conditions in the market for met coal, we must do what is necessary to adapt to the new reality in our industry.”
Walter Energy said it has sufficient cash to assure that vendors, suppliers and other business partners will be paid in full for goods and services that they provide during the reorganization process.
The terms of the restructuring contemplate the senior lenders converting all of their debt into equity. The agreement also establishes a timeline for confirmation of a chapter 11 plan and the fulfillment of certain other conditions and milestones. If the company otherwise cannot satisfy the various conditions and milestones or confirm a chapter 11 plan, it will pursue a sale of substantially all of its assets through a court-supervised auction process.
The company has made customary filings, including first day motions, with the U.S. Bankruptcy Court, which, if granted, will help ensure a smooth transition into the reorganization process without business disruption. The motions are expected, as is standard in cases like this, to be addressed promptly by the court.
Walter Energy has retained Blackstone Advisory Partners L.P. as its financial advisor and Alix Partners LLP as its restructuring advisor. It has engaged Paul Weiss Rifkind Wharton & Garrison LLP and Bradley Arant Boult Cummings LLP for legal advice.
Walter Energy is a leading metallurgical coal producer for the global steel industry with strategic access to steel producers in Europe, Asia and South America. The company also produces thermal coal, anthracite, metallurgical coke and coal bed methane gas, with operations in the United States, Canada and the United Kingdom. Its mainstay operations are two longwall-equipped mines in Alabama producing premium met coal from the Blue Creek seam.
This is just the latest U.S. coal producer to seek bankruptcy protection in a chronically poor coal market that has lasted for over three years, longer than the usual cyclical downturns in a commodity business like this. For example, Patriot Coal, a producer in West Virginia, recently sought bankruptcy and a sale of its assets, after a first round of bankruptcy reorganization earlier this decade failed to solve its financial problems.
Fitch expects poor recoveries for bondholders out of this bankruptcy
Poor unsecured bond recoveries are expected following Walter Energy’s bankruptcy filing, said Fitch Ratings in a July 15 statement. “Walter’s bankruptcy was driven by a market oversupply of metallurgical coal in addition to an untenable debt load stemming from the company’s acquisition of Western Coal Corp., which occurred during a period of peak coal prices,” Fitch said. “Lower prices caused Walter to curtail much of the acquired capacity and eroded cash flows to levels insufficient to sustain the highly levered capital structure.”
Those Western Coal properties are the ones in western Canada that Walter idled last year in the face of poor export met coal markets.
Three of Walter’s outstanding bond issues trade at bid prices that range from approximately 1% to 5% of the combined $1.1 billion face value amount, Fitch said. These low prices reflect the market’s expectations of poor recovery rates on the bonds, which rank junior in seniority to Walter’s first lien term loan and bond debt and which together total approximately $2 billion. Junior creditors receive bankruptcy plan distributions only if the reorganization enterprise value is sufficient to fully repay first lien debtholders as per the absolute rule of priority or as a result of a consensual settlement agreement.
“Walter’s bankruptcy filing propels the beleaguered US metal and mining sector’s total twelve month high-yield default rate up to 7.2% from 5.1% at the end of June 2015,” said Fitch. “The rate is anticipated to rise further if Arch Coal defaults via a distressed debt exchange that is currently being offered to certain debtholders.”
Walter was one of 21 U.S. energy and mining high-yield bond issuers identified by Fitch as having high default risk in a low bond price screening process completed for the “Energy, Power and Commodities Bankruptcy Enterprise Value and Creditor Recoveries” report published April 27.
Fitch said it expects Walter to reorganize as a going concern and to use the bankruptcy process to restructure pre-petition debts totaling more than $3 billion down to a level more appropriate relative to sustainable future cash flows.