S&P: Foresight Energy L. P. Upgraded To 'B-' Following Restructuring; Outlook Negative
We also assigned our 'CCC' issue-level rating to Foresight's new $349 million second-lien PIK notes due August 2021, and new $300 million exchangeable second-lien PIK notes due October 2017. The recovery rating on the notes is '6', indicating our expectation of negligible recovery (0% to 10%) in the event of a payment default.
In addition, we raised our issue-level rating on the company's term loan maturing 2020 to 'B' from 'D', and assigned a 'B' issue-level rating to the company's revolving credit facility maturing in 2018. The recovery rating on this first-lien debt is '2', indicating our expectation of substantial recovery (70% to 90%; lower end of the range) in the event of a payment default, revised from '1'.
Finally we are withdrawing our 'D' rating on the 7.875% senior notes due 2021 that have been exchanged.
The recent restructuring, including exchange of the senior notes, along with associated amendments resolves the previous conditions of default, waives certain amortization requirements, and restores Foresight's access to its revolving credit facility with revised covenants. While we view this restructuring as a positive development and continue to consider Foresight's business risk profile to be among the strongest in the beleaguered coal space, in our view, the company's capital structure could become unsustainable. We consider Foresight's financial risk profile to be highly leveraged based on adjusted debt leverage that we anticipate will remain above 5x, and total interest coverage (including noncash interest) that we expect to be below 2x over the next year. For 2016, our forecasts assume about 20 tons of coal produced, with average prices essentially flat compared to the previous year. We further anticipate that margins, which have been narrowing, will bottom in 2016.
The issuer credit rating also reflects Foresight's control of more than three billion tons of thermal coal in the Illinois basin, and its ownership of four longwall mines. Longwall mines are highly efficient and productive, and the Illinois basin has favorable geology. These factors contribute to Foresight's position as a low-cost producer of thermal coal. However, Illinois basin coal has high sulfur content and is not suitable for use by all power plants. Foresight also faces inherent risks associated with mining, including operating disruptions, increasingly stringent environmental and safety regulations, and price volatility. Near-term price volatility is mitigated by contracted sales with utilities; however, these contracts average only a few years in duration.
The negative outlook reflects our view that Foresight continues to face challenges in its capital structure that could lead to deteriorating credit quality over the next year. We expect discretionary cash flow (operating cash flow less capital spending and dividends) to be marginal, despite near-maintenance-level capital spending and restricted distributions, neither of which is sustainable in the long term. We expect leverage will continue to creep up, and while a significant portion is capitalized, total interest coverage is weak.
We could downgrade Foresight if we felt the company was dependent upon favorable business, financial, or economic conditions to meet its financial commitments. We would also consider a downgrade if Foresight's financial commitments appeared to be unsustainable in the long term. This could be indicated by less than adequate liquidity or interest coverage sustained below 1x.
We could revise the outlook to stable if Foresight resolves its 2017 maturity. We could also revise the outlook to stable if we considered liquidity to be strong, or if Foresight established a history of positive discretionary cash flow.