Fitch Downgrades Peabody Energy Corp. IDR to 'CCC'
The downgrade reflects Fitch's view that liquidity could become constrained in the absence of higher metallurgical coal prices. For 2015, Fitch believes EBITDA could be about $400 million and free cash flow burn could reach about $500 million. While Fitch believes the cash burn would slow in 2016 and reverse in 2017 with the roll-off of hedges, halt of LBA and VEBA payments and modest recovery in metallurgical coal prices, the total debt with equity credit to EBITDA could be above 7x in 2017, which could limit access to capital to refinance the $1.5 billion notes due 2018. Fitch believes the coal markets are at or near the bottom of the cycle and should show slow recovery but that excess capacity has been slow to rationalize.
A complete list of rating actions follows at the end of this release.
Peabody Energy Corporation's (Peabody) credit ratings reflect large, well-diversified operations, good control of low-cost production, exposure to high growth markets in Asia, top-line visibility in the domestic market, adequate liquidity, and high financial leverage. Weakness in pricing for the company's Australian coals, partially offset by cost reductions and currency moves, coupled with high interest expense following the 2011 leveraged acquisition of Macarthur Coal Limited, has resulted in low earnings, cash flows and debt repayment.
KEY RATING DRIVERS
Industry Risk: Steam coal demand in the U.S. is currently suffering from heavy competition from very low natural gas prices, supply has been disciplined, but stocks are on the high side and prices are soft. Lack of new coal fired power plant builds and shuttering obsolete plants constrains growth in the U.S. Globally, both metallurgical (met) and steam coal markets are in excess supply and prices are weak. Coal producers have been running for cash with a focus on reducing costs which has delayed price recovery. In particular, Fitch believes the hard coking coal bench mark price could average about $105/tonne (t) and the Newcastle steam coal benchmark could be below $62/t over the next 12 months versus current prices of $93/t and $67.80/t respectively. The industry is consolidating, which should benefit supply/demand dynamics longer term.
Recovery: Fitch has adjusted its multiple from 6x to 5.5x and reduced its low midcycle EBITDA from $1 billion to $980 million to better reflect expectations and valuations.
Expectations: Fitch believes operating EBITDA could drop to $400 million for 2015 on low average metallurgical coal prices and Asia Pacific steam coal prices. Under the same assumptions, negative free cash flows could be about $500 million. Peabody guides to 2015 capital expenditure of $170 million to $190 million before coal lease expenditures ($280 million in 2015). Cash interest expense runs about $430 million and dividends are about $3 million, annually. Management believes the 2014 capital spending level can be maintained for two to three years.
KEY ASSUMPTIONS:
--2016 Benchmark hard coking coal and Newcastle prices of $105/t and, $65/t respectively;
--Production in the Western U.S. at 3 million tons below guidance;
--Other production, dividends and capital spending at guidance;
--No additional asset sales are factored into the projections.
Company Profile: Peabody is the largest private sector coal company, globally, with 26 active mining operations producing primarily low-sulfur thermal coal from the Powder River Basin (PRB - 2014, 142 million tons sold), high heat thermal coal from the Illinois Basin (IB - 2014, 25 million tons sold), and thermal and metallurgical (met) coal in Australia primarily for the Pacific Basin seaborne markets (2014, met 18 million tons sold, steam 20 million tons sold). As of Dec. 31, 2014, proven and probable reserves were 7.6 billion tons, down from 8.3 billion tons at Dec. 31, 2013.
Operating Environment: The industry is heavily regulated as to safety and the environment. The company has a good compliance history. Shipments can be disrupted by geology, weather, or transportation events beyond management control.
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Failure to obtain covenant waivers when required.
Positive: Future developments that may lead to a positive rating action may include:
--Rationalization of excess supply in the seaborne metallurgical and steam coal markets resulting in improved prices.
--Liquidity enhancing activity resulting in proceeds of $500 million in aggregate.
LIQUIDITY AND DEBT STRUCTURE
Financial Flexibility: At March 31, 2015, pro forma for the April redemption of the remaining 2016 notes, cash and equivalents were $543 million, of which, $500 million was held by U.S. entities. The $1.65 billion revolver due September 2018 was utilized only for letters of credit in the amount of $114.6 million and the $275 million off-balance sheet asset securitization facility due April 2016 was drawn in the amount of $45 million and had $34.1 million of remaining capacity. The revolver has a minimum interest coverage covenant of 1x through maturity and a net first lien leverage maximum of 4.5x. Scheduled maturities of long-term debt over the next five years are estimated at $21 million in 2015, $19 million in 2016, $13 million in 2017, $1.5 billion in 2018 and $12 million in 2019.
Capital Structure: Total debt with equity credit of $6.4 billion compares to LTM March 31, 2015 operating EBITDA of $763 million at 8.4x. Fitch expects scant debt reduction in advance of 2017 absent asset sales. Total debt could increase to as much as $6.8 billion with revolver draws in 2016. Fitch expects leverage could be above 7x through 2017 before declining.
FULL LIST OF RATING ACTIONS
Fitch downgrades the following ratings:
--IDR to 'CCC' from 'B';
--Senior secured revolving credit and terms loan to 'B'/'RR1' from 'BB'/'RR1';
--Senior second lien secured notes to 'B-'/'RR2' from
'BB-'/'RR2';
--Senior unsecured notes to 'CCC-'/'RR5' from 'B'/'RR4';
--Convertible junior subordinated debentures to 'CC'/'RR6' from 'CCC+'/'RR6'.
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