Fitch downgrades default rating for top U.S. coal producer Peabody Energy

Fitch Ratings said Feb. 12 that it has downgraded Peabody Energy‘s (NYSE: BTU) long-term Issuer Default Rating (IDR) to ‘CC’ from ‘CCC’.

Approximately $8.4 billion in face amount of obligations is affected by the rating actions. The downgrade of the IDR reflects Fitch’s view that default of some kind appears probable following increased demands on liquidity, negotiations with creditors for a distressed debt exchange, continued competition in domestic markets from cheap natural gas and bankrupt coal producers, expectation of a delayed recovery in the seaborne metallurgical coal market from very low levels, and prospects for further weakness in the Asia Pacific steam coal markets.

Peabody is the nation’s top coal producer and a major coal producer in Australia. It lately has tightened its belt, and has a pending deal to sell coal mines in Colorado and New Mexico to raise cash. Major competitors Alpha Natural Resources and Arch Coal are in bankruptcy protection.

Fitch believes that the company has sufficient cash to support operations for roughly 18 months absent asset sales. On Feb. 9, 2016, Peabody drew the remaining availability under its $1.65 billion revolving credit facility resulting in cash balances of $778.5 million. Peabody reports that it has $123 million available under its accounts receivable securitization facility. Peabody reports that letters of credit were $823.7 million as of Feb. 9, 2016, up from $560 million at Sept. 30, 2015, of which $228.7 million was outstanding under the revolver and $120 million was outstanding under the A/R facility.

Fitch expects cash burn in 2016 and 2017 aggregating $787 million using 2016 guidance on volumes, costs and capital expenditures.

Scheduled maturities of long-term debt over the next five years are estimated to be $102 million in 2016, $13 million in 2017, $1.5 billion in 2018, $12 million in 2019 and $1.8 billion in 2020.

$1.5 billion in senior unsecured notes are due in November 2018 and Fitch believes these will need to be refinanced. In December 2015, Peabody disclosed that it was in discussions with the note holders on a distressed debt exchange. The discussions involve Peabody’s potential interest in raising $150 million in debt financing secured by certain of its Australian assets and a $250 million secured letter of credit facility through subsidiaries that do not guarantee Peabody’s debt. No update was provided on the Feb. 11, 2016, earnings call.

The company has agreements to sell assets in the first quarter of 2016 for net proceeds aggregating $415 million. This figure includes the sale of its New Mexico and Colorado assets to Bowie Resources, with Bowie currently in the term loan market to raise $650 million to finance the transaction. Fitch views access to the capital markets as extremely challenging for coal producers.

In July 2015, Peabody announced the sale of its idled Wilkie Creek mine in Australia for up to $75 million including cash of up to $20 million and assumption of liabilities totalling $55 million. The transaction would also release certain guarantees in place for reclamation activities. Closing has been delayed as the buyer is having difficulty obtaining finance.

Fitch has dropped its multiple assumption from 5.5x to 4.5x given how much of the industry is distressed and the need for asset valuations to incorporate assumption of asset retirement obligations. Fitch notes that using a 4x multiple results in an enterprise value that is close to a liquidation value.

Peabody’s fifth annual and final $250 million federal coal lease payment is in 2016. Its fourth annual and final Patriot Coal-related VEBA payment in the amount of $70 million is in 2017. Patriot Coal is a Peabody spin-off company that was liquidated in bankruptcy a few months ago. Peabody and the United Mine Workers of America union agreed to a revision of this obligation, which if approved by the court, reduces Peabody’s obligations by $70 million in 2017.

Fitch’s key assumptions within the rating case for Peabody include:

  • 2016 Benchmark hard coking coal and Newcastle prices of $85/t and, $50/t respectively;
  • Production, dividends and capital spending at guidance;
  • Asset sales that have been announced and not delayed are factored into the projections.

Future developments that may, individually or collectively, lead to negative rating action include:

  • Failure to pay debt service within grace periods and or bankruptcy filing would result in a downgrade of the IDR to ‘D’.
  • Distressed Debt Exchange would result in a downgrade of the IDR to ‘RD’.

Future developments that may, individually or collectively, lead to negative rating action include:

  • Expectation of positive free cash flow generation.
  • Liquidity enhancing activity resulting in proceeds of $500 million in aggregate.
About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.