By The Editorial Board of the St. Louis Dispatch
March 15, 2017 - Beginning Thursday, a novel concept will be tested in federal bankruptcy court in St. Louis: Will a judge approve a reorganization plan tailored by a company’s executives, in league with hedge funds that own most of its debt, that greatly benefits the executives and hedge funds while leaving smaller, non-institutional creditors holding the bag?
The company in question is Peabody Energy, the largest coal company in the United States, and one of the largest employers left in downtown St. Louis. While the long-term future of the coal industry is shaky, its near-term prospects are looking up, one reason some creditors have major objections to Peabody’s reorganization plan.
If U.S. Bankruptcy Judge Barry Schermer approves, the new Peabody will emerge from bankruptcy next month with a market capitalization of $3.1 billion. Some disgruntled creditors claim the company is worth far more than that, particularly with President Donald Trump promising to make the industry boom again. If the company was valued higher, there would be money left over for holders of “old” Peabody shares and debt, who get none of the value of the “new” Peabody.
Ten percent of the new shares will be distributed to Peabody’s 7,000 employees. Shares worth between $30 million and $45 million will go to the six top executives who worked on the bankruptcy plan. The biggest slice, about $15 million, will go to CEO Glenn Kellow, an Australian who joined the company in 2013. In addition to stock, the reorganization plan calls for paying the six top executives $11.9 million in cash bonuses.
Executives who don’t flee bankrupt companies and stay around to help reorganize them generally get bonuses for taking the risk. But by granting themselves millions in new Peabody shares, the Peabody executives appear to be doing extra well for themselves.
Critics of the deal say it rewards “vulture capitalists” whose hedge funds invest in distressed companies, advocate bankruptcy and then use their combined clout to tilt the reorganization plan in their favor. The hedge funds, led by Peter Singer’s Elliott Management and Mark Brodsky’s Aurelius Capital, jointly hold the bulk of Peabody’s $8 billion in debt. They’ll be first in line for repayment and get three seats on the new company’s board of directors.
The reorganization plan obliges Peabody to continue paying retiree benefits. In the past, Peabody has wriggled off from those obligations by offloading them onto a spinoff company. The plan also calls for Peabody to continue making payments to states for reclamation of land ravaged by decades of mining.
As for those holding the “old” Peabody’s shares and unsecured debt, they’ll get no part of the mine but the shaft. Executives who go no nearer a coal mine than the Gateway Mall will find bankruptcy very profitable.