Monday, October 24, 2016

Peabody Short Squeeze $BTUUQ

Over the past week there has been a monster squeeze in the delisted shares of bankrupt Peabody Energy. They had been trading at about $1.70 and are now $17. This 10x increase has increased the equity market capitalization from $31 million to $310 million.

The bonds have also rallied, with the unsecured debt now at about 50 and the subordinated notes at 23 cents on the dollar.

The company is massively indebted... which is why it filed for bankruptcy in the first place. There are $3.7 billion of the unsecured notes all trading at about 50 cents on the dollar. That indicates a $1.87 billion hole before the subordinated debt would be in the money. (And that doesn't count six months of accrued interest on the unsecured debt, either.)

The $367 million of subordinated notes trading at 23 represents a value hole of $268 million. The current equity price does not make sense to me in light of the significant (multiple billions of dollars) degree that the credit markets perceive the notes to be out of the money.

Consensus has been that the equity is not in the money. Hence the company's disclosure in its Monthly Operating Report:
It is uncertain at this stage of the Chapter 11 Cases if any proposed plan of reorganization would allow for distributions with respect to Peabody Energy equity or other securities. It is likely that Peabody Energy equity securities will be canceled and extinguished upon confirmation of a proposed plan of reorganization by the Bankruptcy Court, and that the holders thereof would not be entitled to receive, and would not receive or retain, any property or interest in property on account of such equity interests. In the event of cancellation of Peabody Energy equity or other securities, amounts invested by the holders of such securities would not be recoverable and such securities would have no value. Trading prices for Peabody Energy's equity or other securities may bear little or no relationship during the pendency of the Chapter 11 Cases to the actual recovery, if any, by the holders thereof at the conclusion of the Chapter 11 Cases. Accordingly, Peabody Energy urges caution with respect to existing and future investments in its equity or other securities.
Also, the view that the equity is out of the money seems to have led to a significant amount of selling call options. A squeeze started last week, and then a hedge fund filed a 13D that poured gas on the fire:
The Reporting Persons purchased the securities of the Issuer reported herein based on their belief that such securities are undervalued and represent an attractive investment opportunity. Depending upon overall market conditions, other investment opportunities available to the Reporting Persons, and the availability of securities of the Issuer at prices that would make the purchase or sale of such securities desirable, the Reporting Persons may endeavor (i) to increase or decrease their respective positions in the Issuer through, among other things, the purchase or sale of securities of the Issuer on the open market or in private transactions or otherwise on such terms and at such times as the Reporting Persons may deem advisable and/or (ii) to enter into transactions that increase or hedge their economic exposure to the Shares without affecting their beneficial ownership of Shares. The Reporting Persons are in the process of retaining legal and financial advisors to assist them in seeking the formation of an official equity committee and to preserve and realize on the substantial value of the Shares. In addition, the Reporting Persons intend to contact and speak with other holders of the Shares for the foregoing purposes.
It's tough for anyone to express the view that the shares are overpriced (except longs, who could just sell the shares). The options are "closing trades only" because the equity was delisted after the bankruptcy filing, and the cost to borrow the stock is 100% annual!


Anonymous said...

Something similar to the KBIO squeeze earlier in the year.

CP said...

Anonymous said...

Trump victory fueling leg #2. Looks like lower tier bonds getting a bid as well.