Wednesday's bankruptcy filing by coal producer Peabody Energy boosts the trailing 12-month (TTM) US institutional leveraged loan default rate in the troubled metals/ mining sector to 29% from 25% and the overall loan market TTM default rate to 1.9%, Fitch Ratings says. Approximately $8.4 billion of loan and bond debt is affected.
The high yield bond April TTM metals/mining rate will climb to 20% from 14.6% while the overall rate will hit 3.9%. In addition, the coal subsector TTM default rate will approach 70%.
Fitch's view, (as reflected in our RR6 unsecured issue rating) is that recovery prospects on the notes are poor, based on our enterprise valuation of Peabody in a reorganization scenario. The market bid prices of about 0.05 are consistent with this expectation. Peabody fully drew down on its $1.65 billion revolving credit facility on Feb. 9, 2016, which further subordinated the unsecured notes within the capital structure. The $1.2 billion term loan was bid at $0.38375 and the second lien notes were trading a $0.06625. The below average loan bid and poor bond trading price are indicative of the low current valuations in the adverse operating environment.
Peabody filed for bankruptcy in the face of a wide range of challenges including: high debt balances following the 2011 acquisition of Macarthur Coal; competition from cheap natural gas and high coal and natural gas stocks in the United States; weak seaborne coal markets in the Asia Pacific markets; and sticky capital expenditures that led to cash burn and reduced liquidity. The debt-laden capital structure became unsustainable as cash flows worsened and access to capital markets evaporated.
A planned asset sale to privately held Bowie Resource Partners fell through in February 2016 when the buyer was unable to complete financing and Peabody did not realize the expected boost to liquidity. Asset sales in the beleaguered mining sector are difficult given the coal market imbalance of supply, secular decline and a lack of financially sound strategic buyers.
Recent Chapter 11 filings by other US coal companies alleviated their debt burden while reducing interest expense and other costs, and it made increasing sense for Peabody to follow in their footsteps. Bankruptcy filings by leveraged coal miners included: Arch Coal (January 2016), Alpha Natural Resources (August 2015), Walter Energy (July 2015) and Patriot Coal (May 2015).