Tuesday, December 22, 2015

"Moody's downgrades Peabody's ratings (CFR to Caa3), outlook negative" $BTU


"The downgrade reflects our expectation of continued deterioration in the company's credit metrics due to the ongoing decline in the seaborne metallurgical coal markets and weakness in the US and seaborne thermal coal markets, as well as our expectation that market recovery will be slower and more protracted than previously anticipated. As of September 30, 2015, the company's Debt/ EBITDA, as adjusted stood at 8.7x, and over the preceding twelve months the company burned over $500 million in cash. We expect the leverage to continue increasing and liquidity to continue deteriorating, absent market improvements or deleveraging actions.

On December 17, 2015 the company filed Form 8-K with the US Securities and Exchange Commission, stating that it continues to evaluate its options to reduce leverage and preserve liquidity, including potential debt exchanges and buybacks. The ratings reflect our expectation that if the company undertakes debt exchanges and/or other restructuring options, the debt holders will not recover the full amounts due as outlined in the original debt agreements, which would meet Moody's definition of default.

The B3 rating on the secured facility, three notches above the Caa3 CFR, reflects the security provided by the collateral package, which includes a claim on certain US properties and various stock pledges. The Caa3 rating on the second lien notes, in line with the CFR, reflects their relative position in the capital structure with respect to claims on collateral, behind the senior secured credit facility but ahead of the Ca rated unsecured notes and C rated subordinated debentures.

The speculative grade liquidity rating of SGL-3 reflects adequate liquidity, including cash and cash equivalents of $334 million, $1.4 billion available under $1.65 billion revolver and $48 million of available capacity under the accounts receivable securitization program as of September 30, 2015. We expect that absent a market recovery, the company may have limited headroom under covenants in 2016. Peabody has several alternatives for arranging back-door liquidity if necessary. Peabody's large number of mines and its operational diversity across the PRB and Illinois Basin give it the flexibility to sell non-core assets if necessary."
The Peabody 4.5% notes traded at 5 cents. The bond market is essentially saying that the company can pay the next two coupons (which would be June 2016 and December 2016), but not a third.

2016 should be an exciting year for restructurings, especially in mining and oil E&P.

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