Tuesday, July 22, 2014

Couple Comments on Metallurgical Coal Credits

UBS on coal miners:

"In our view, Alpha, Arch, and Walter may not be good Chapter 11 restructuring candidates since debt comprises most of the long term liability pie. There may be limited ability to shed other liabilities through a restructuring process. Hence, it may make more sense for unsecured bondholders to do exchange offers or agree to other concessions out of bankruptcy. That said, companies with a larger amount of secured debt, like Walter, may be more inclined to go through a Chapter 11 process in anticipation of higher recoveries."
Moody's on met coal:
"At these prices, all Moody's-rated US met coal producers will continue to be stressed, with those that acquired met-coal assets at the height of the market labouring under very high leverage."
Sounds like WLT.

"The Case For Higher Rates Looks Weak… Again"

Exactly:

"The answer, of course, is that the economic profile is still too weak to support higher rates. You can argue, as many do, that it’s all a mirage and that the Fed is artificially holding down long rates. Maybe, but that argument is weak once you consider that private holders of Treasuries include investors the world over and Fed policy doesn’t preclude those investors from selling and driving up rates."
Our hypothesis: Fed purchases of from the flow of Treasury issuance caused interest rates to be higher because the stock of fixed income instruments vastly exceeds the size of the flow of purchases, and those purchases made the holders nervous about inflation.

J.S. Bach - Prelude and Fugue in D Major (BWV 532) - For Orchestra

"China has a history of recurring and traumatic financial crises since liberalization"

Great y0ungmoney post:

"[Y]ou have plenty of professional investors today talking about how the China bear thesis hasn't played out, China is different because of this or that, 'urbanization' will drive growth (and not the other way around), and that shares look 'cheap'. I shudder to think of the well meaning investment professionals in this country allocating to funds raising capital to invest in distressed assets, credulously believing that this is a fair market system that respects the interests of private investors"

Monday, July 21, 2014

James River Coal Delays Auction Again $JRCC $JRCCQ

Latest filing.

Pursuant to the Strategic Transaction Bidding Procedures, the Debtors have determined, in their reasonable judgment and in consultation with the DIP Agent and the UCC, to adjourn the Auction and the Sale Hearing to the following dates:
(a) Auction: July 28, 2014 at 1:00 p.m. (prevailing Eastern Time), to be held at the offices of counsel to the Debtors, Davis Polk & Wardwell LLP, 450 Lexington Avenue, New York, New York 10017.
(b) Sale Hearing (if the Successful Bid contemplates a Sale): Date to be determined
Not having much luck marketing the assets, I wonder?

Sunday, July 20, 2014

Color on Retail from Leggett & Platt $LEG

Link

"Leggett & Platt expects to record a $108 million pre-tax, non-cash goodwill impairment charge for the second quarter. This charge reflects the complete write off of the goodwill associated with the Store Fixtures group, which is part of the Commercial Fixturing & Components segment. The EPS impact of the non-cash charge is expected to be 65 cents per share. Apart from this impairment, the company has made no update to the underlying full year EPS guidance issued in April.

As previously disclosed, the Store Fixtures group's 2013 performance fell short of expectations. Performance did not rebound during the second quarter of 2014 as expected, with the deterioration of revenue and profitability most pronounced in May and June. Consequently, it has become apparent that the current market value of the Store Fixtures unit has fallen below its recorded book value. This stems from lower current expectations of future revenue and profitability, reflecting reduced market demand for the shelving, counters, showcases and garment racks the company supplies to major retailers."
A correspondent writes,
"just think about all the stores that are closing. If you are still in business, you are going to take whatever fixtures that can be removed without too much effort and put them in any other stores you might be opening or use for spares. Total retail space is going down. Full stop. These guys are just catching up with reality."
This is an interesting indicator. Here's more about the store fixtures group.

More Thoughts On Walter Energy

Walter Energy's cash may be seriously eroding with these metallurgical coal prices (mentioned by an Australian competitor), which are down significantly from the first quarter.

"Whitehaven’s metallurgical coal achieved an average price of $US93.63 a tonne in the June quarter, which it expects to fall to as low as $US91 a tonne in the current quarter."
By comparison, in Walter's Q1 2014 report, it disclosed that its
"average selling price of hard coking coal in the first quarter of 2014 was $127.39 per metric ton, representing a 19.0% decrease from the average selling price of $157.28 per metric ton for the same period in 2013."
So, we are talking about a sales price that has fallen significantly from Q1. Speaking of Australia, you have to understand what happened over the past four years in metallurgical coal to understand the problem Walter Energy is having:
"Australian met coal producers have an advantage over U.S. ones due to a freight and quality advantage, so U.S. met coal producers have a better shot at domestic use and at selling to European consumers. U.S. producers are marginal producers, particularly susceptible to decreases in demand because they have higher freight costs and lower quality coal.

Flooding in Australia in 2010-2011 caused a met coal supply shock, pushing up the prices of iron ore, steel, and especially met coal. At the same time that this supply shock abated, the frenzy of construction in China and therefore demand for steel has started to slow."
Unfortunately, in November 2010 - during this temporary supply shock that also occurred during a demand shock of China using an unsustainable amount of basic materials (i.e. "top of cycle") - Walter Energy decided to go out and pay $3.25 billion for Western Coal. From a December 2010 press release:
"This is a transformative transaction at a time when global demand for metallurgical coal is surging," said Joe Leonard, interim chief executive officer of Walter Energy. "Western Coal has an attractive high-quality metallurgical coal asset base and has embarked on an organic growth strategy that is expected to increase production more than 60 percent by fiscal 2013. It is a unique strategic fit with Walter Energy's large scale, high-productivity mines which produce premium-quality metallurgical coal for customers in South America and Europe. Our combined production capacity and geographic footprint leaves us extremely well positioned to benefit from favorable sector dynamics driven by increased steel production in markets such as China, India and Brazil. Bottom line, this is the right transaction at the right time."
Speaking of Australia, you never want to hear that your lower cost competitors are "holding up well" selling below your cash cost.
"Australian producers of metallurgical coal are holding up well at today’s 'extremely low' prices, and said only a few operators were incentivised to close mines"
A correspondent writes, "Yep, this is how markets for commodities clear. High cost producers have to shut down."