A pending restructuring – Peabody Energy

I alluded to, but didn’t name Peabody Energy (NYSE: BTU) as the victim in my August 10 post about a pending debt restructuring. Peabody Energy is in one of the most hated sectors, coal mining. They operate thermal and metallurgical mines in Australia, and a large thermal mine in the USA (in the Powder River Basin, Wyoming) which had its own drama with the Federal Trade Commission that I won’t get into the details. Essentially, the plan was to form a 70/30 joint venture with Arch Resources (NYSE: ARCH) to synergize a huge amount of cost savings on their (very cash profitable) thermal coal mining operation. The FTC rejected it, citing anti-trust.

My timing for the exit of Peabody’s 2022 debt was quite poor as in the prevailing 2 months after the post, the debt traded some 30% higher, but I was generally not cognizant of the state of the market (there was quite a bit of speculation embedded in the lead-up to the Powder River Basin decision which I thought was already baked into the bond price, but clearly it was not).

In their last 10-Q, Peabody ramped up the language to state:

While the Company was compliant with the restrictions and covenants under its debt agreements at September 30, 2020, noncompliance with the first lien leverage ratio covenant under the Company’s Credit Agreement (as defined in Note 12. “Long-term Debt”) is probable as of December 31, 2020, if the Company does not successfully take mitigating actions.

But what was really interesting and fascinating from a debt renegotiation perspective is the 8-K that was released which gave a fairly detailed status of the negotiations with the secured creditors, including the 2022 noteholders. Peabody wants to negotiate an extension, but the parties are far, far off (the least of which is that the noteholders want 12%, while Peabody is willing to go up to 7.125%).

Discussion Materials / November 1 resolution / November 4 resolution

I know the last thing you want to do is probably look at more slide decks, but considering that the public rarely gets to see these backroom negotiations, for those finance folks out there, you’ll get a big kick from it.

I do notice today that Interactive Brokers is no longer showing any quotes for the debt. Yesterday the closing quote was bid 36.45 and ask 46, with the last trade being $200k traded at 37. Illiquidity is one of the reasons why I dumped as quickly as I did – you never know when the rug will get pulled from underneath.

Finally – this company violates Sacha’s investing rules on ticker symbols, which is the following: If the ticker symbol has no resemblance to the company’s name, don’t invest.