Fitch Downgrades Peabody Energy's IDR to 'CC', 2nd Liens to 'C'
The downgrade of the IDR reflects Fitch's view that default of some kind appears probable following increased demands on liquidity, negotiations with creditors for a distressed debt exchange, continued competition in domestic markets from cheap natural gas and bankrupt coal producers, expectation of a delayed recovery in the seaborne metallurgical coal market from very low levels, and prospects for further weakness in the Asia Pacific steam coal markets.
The downgrade of the second lien notes reflects their position in the capital structure after the \\$1.7 billion revolver, the \\$1.3 billion term loan, and letters of credit- secured by receivables as well as Fitch's assumptions for lower going concern EBITDA and lower enterprise value multiples. Please see the discussion on Recovery Analysis below.
KEY RATING DRIVERS
Liquidity: Fitch believes that the company has sufficient cash to support operations for roughly 18 months absent asset sales. On Feb. 9, 2016, Peabody drew the remaining availability under its \\$1.65 billion revolving credit facility resulting in cash balances of \\$778.5 million. Peabody reports that it has \\$123 million available under its accounts receivable securitization facility. Peabody reports that letters of credit were \\$823.7 million as of Feb. 9, 2016 up from \\$560 million at Sept. 30, 2015 of which \\$228.7 million was outstanding under the revolver and \\$120 million was outstanding under the A/R facility.
Fitch expects cash burn in 2016 and 2017 aggregating \\$787 million using 2016 guidance on volumes, costs and capital expenditures.
Scheduled maturities of long-term debt over the next five years are estimated to be \\$102 million in 2016, \\$13 million in 2017, \\$1.5 billion in 2018, \\$12 million in 2019 and \\$1.8 billion in 2020.
Covenants: The revolver has a minimum interest coverage covenant of 1x through maturity and a net first lien leverage maximum of 4.5x. Fitch has forecast covenants in compliance using a \\$90 million add-back to EBITDA since the bank agreement adds non-cash share-based compensation (\\$40 million) and asset retirement obligation expenses (\\$52 million) together with other items.
Maturity in 2018: \\$1.5 billion in senior unsecured notes are due in November of 2018 and Fitch believes these will need to be refinanced. In December 2015, Peabody disclosed that it was in discussions with the note holders on a distressed debt exchange. The discussions involve Peabody's potential interest in raising \\$150 million in debt financing secured by certain of its Australian assets and a \\$250 million secured letter of credit facility through subsidiaries that do not guarantee Peabody's debt. No update was provided on the Feb. 11, 2016 earnings call.
Asset Sales: The company has agreements to sell assets in the first quarter of 2016 for net proceeds aggregating \\$415 million. This figure includes the sale of its New Mexico and Colorado assets to Bowie Resources currently in the term loan market to raise \\$650 million to finance the transaction. Fitch views access to the capital markets as extremely challenging for coal producers.
In July 2015, Peabody announced the sale of its idled Wilkie Creek mine for up to \\$75 million including cash of up to \\$20 million and assumption of liabilities totalling \\$55 million. The transaction would also release certain guarantees in place for reclamation activities. Closing has been delayed as the buyer is having difficulty obtaining finance.
Recovery Analysis: Fitch has dropped its going concern EBITDA from \\$980 million to \\$650 million to reflect long term lower volumes in the U.S., reduced overhead and break-even conditions in Australia. Peabody reported that Australian mining adjusted EBITDA was \\$175.4 million, before hedging activity, U.S. mining adjusted EBITDA was \\$937.2 million, and consolidated adjusted EBITDA was \\$434.6 million in 2015.
Fitch has dropped its multiple assumption from 5.5x to 4.5x given how much of the industry is distressed and the need for asset valuations to incorporate assumption of asset retirement obligations. Fitch notes that using a 4x multiple results in an enterprise value that is close to a liquidation value. Fitch has assumed a concession allowance at 5% of enterprise value to be spread among the second lien, unsecured and junior subordinated notes.
Capital Requirements to decline: The company's fifth annual and final \\$250 million federal coal lease payment is in 2016 its fourth annual and final Patriot Coal related VEBA payment in the amount of \\$70 million is in 2017. The company and the United Mine Workers of America agreed to a revision of this obligation, which if approved by the court, reduces Peabody's obligations by \\$70 million in 2017.
In addition, the company's hedge position has limited its benefits from the weaker Australian dollar and lower fuel prices. Fitch notes that these hedges are at the parent company.
Fitch's key assumptions within the rating case for Peabody include:
--2016 Benchmark hard coking coal and Newcastle prices of \\$85/t and, \\$50/t respectively;
--Production, dividends and capital spending at guidance;
--Asset sales that have been announced and not delayed are factored into the projections.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Failure to pay debt service within grace periods and or bankruptcy filing would result in a downgrade of the IDR to 'D'.
--Distressed Debt Exchange would result in a downgrade of the IDR to 'RD'.
Positive: Future developments that may, individually or collectively, lead to negative rating action include:
--Expectation of positive free cash flow generation.
--Liquidity enhancing activity resulting in proceeds of \\$500 million in aggregate.
FULL LIST OF RATING ACTIONS
Peabody Energy Corporation
--Long-term IDR downgraded to 'CC' from 'CCC';
--Senior secured revolving credit and terms loan downgraded to 'CCC/RR2' from 'B/RR1';
--Senior second lien secured notes downgraded to 'C/RR6' from 'B-/RR2'
--Senior unsecured notes downgraded to 'C/RR6' from 'CCC-/RR5';
--Convertible junior subordinated debentures downgraded to 'C/RR6' from 'CC/RR6'.