By John W. Miller and Matt Jarzemsky
Peabody Energy Corp., the largest U.S. coal company, became the
latest to file for bankruptcy Wednesday, underscoring the fraying
future of corporate coal mining in America.
The bankruptcy of the St. Louis-based company came after similar
filings by Arch Coal Inc., Alpha Natural Resources, Inc., Patriot
Coal Corp. and Walter Energy, Inc., all of whom have also recently
sought chapter 11 protection.
Chief Executive Glenn Kellow called the current coal market
"historically challenged" and said the filing was "an in-court
solution to Peabody's substantial debt burden."
No large publicly listed U.S. coal miner has been spared by the
forces crushing the coal industry, which include new environmental
regulations, the decline of steel production, and the conversion of
coal-fired power plants to natural gas, which has become a cheap
and abundant source of fuel thanks to the shale boom.
Peabody's bankruptcy sets the stage for a potentially bitter
fight among creditors for its assets, which include massive
open-pit complexes in Wyoming and Australia and underground mines
in Illinois.
America may never again see a coal company as big as Peabody.
Founded in 1883 by Francis Peabody with $100, a wagon and two
mules, according to the company's corporate history, Peabody grew
into a juggernaut, producing coal for customers in 25 countries and
employing 7,600 people.
But its decline has been precipitous in recent years. In 2011,
Peabody's value on the stock market briefly touched $20 billion. It
is now worth $38 million.
Peabody expects a bankruptcy-court fight between lenders and
bondholders over which of its mines secured bondholders can lay
claim to, according to people familiar with the matter.
Bondholders including Elliott Management Corp. and Aurelius
Capital Management LP are expected to argue that Peabody's debt
agreements significantly reduce lenders' claims on mines and other
assets, leaving more value for bondholders, the people said.
The firms are known for investing in distressed debt and a
willingness to engage in legal battles to protect their
investments. Elliott and Aurelius, which were founded respectively
by billionaire Paul Singer and former Elliott Management portfolio
manager Mark Brodsky, are poised to make big profits on a
decade-plus legal fight with Argentina over defaulted sovereign
bonds.
Many of the creditors expected to vie for control of Peabody's
assets bought their debt at steep discounts, according to people
familiar with the matter. The company's bonds and loans have
tumbled in recent years along with coal prices. A $1 billion series
of bonds Peabody sold just last March recently traded for 7 cents
on the dollar, according to MarketAxess, indicating that some
investors that bought the debt when it was issued later sold at a
steep loss.
Peabody said Wednesday it had obtained $800 million in emergency
financing, arranged by Citigroup Inc., and has enough cash to keep
running mines and delivering coal to customers. Citigroup didn't
respond to requests for comment. Peabody last month said it had
delayed interest-rate payments on two loans and warned it may not
have sufficient liquidity to sustain operations, warning of a
possible chapter 11 filing.
Peabody has now lost money in nine straight quarters and in 2015
posted a $2 billion deficit. The company also been weighed down by
its ill-timed acquisition of Australia's Macarthur Coal Ltd. for
$5.1 billion in 2011. Prices have been declining ever since.
As of the end of 2015, Peabody carried its assets worth about
$11 billion, and liabilities over $10 billion. That includes $4.3
billion of secured loans and bonds and $4.5 billion of unsecured
bonds.
Things are likely to get worse before they get better. By 2020,
demand for U.S. coal is expected to have fallen to 20% less than
what U.S. mines produce, according to McKinsey.
"In the future, coal companies will only be able to borrow
against the value of their future contracts," says Monica Bonar, a
director at Fitch Ratings. "Speculative lending in coal is a thing
of the past."
Peabody executives insist they believe the company's mines have
a future, even if coal use is poised to decline. They cite the
Environmental Protection Agency's estimates that as much as 802
million tons of coal will be burned in the U.S. in 2050, roughly
the same as last year. Coal use is expected to decline to 680
million tons this year.
Peabody filed for chapter 11 protection for most of its U.S.
entities in the bankruptcy court for the Eastern District of
Missouri. All mines and offices are continuing to operate during
this process, the company said, adding that none of its Australian
operations is included in the filings and continue to operate as
usual. The coal producer said it has also dropped plans to sell
mines in New Mexico and Colorado after the buyer couldn't get
financing to complete the deal.
Because many of Peabody's mines are still individually
profitable, the filing "feels mostly like a balance-sheet
restructuring exercise more than an eliminating mines exercise",
said Mark A. Levin, a BB&T Capital Markets managing director.
However, he said that didn't eliminate the possibility that Peabody
may take the opportunity to shed less profitable mines.
The industry's setbacks have been damaging well beyond Wall
Street, especially in the coal strongholds of Wyoming and
Appalachia, wiping out tens of thousands of jobs, denting tax
revenues and giving ammunition to pro-coal politicians.
Peabody estimates its future clean-up costs and other
environmental obligations at $723 million, a concern for activists.
The miner shouldn't be allowed to "walk away from the billions of
dollars in damages to landscapes, wildlife, and crucial water
supplies that are part of coal's legacy," said Theo Spencer, of the
Natural Resources Defense Council.
Coal isn't the only commodity getting hammered by the weaker
global economy. Prices for copper, steel, aluminum and other
industrial goods have been fallen steeply this decade as demand has
weakened around the world, especially in China. Peabody's move
raises the default rate for U.S. metals and mining companies in the
past 12 months to 29% from 25%, according to a report released
Wednesday by Fitch Ratings.
--Alex MacDonald contributed to this article.
Write to John W. Miller at john.miller@wsj.com and Matt
Jarzemsky at matthew.jarzemsky@wsj.com
(END) Dow Jones Newswires
April 13, 2016 15:51 ET (19:51 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.