Peabody in Race to Avoid Bankruptcy
By Peter Ker
November 10, 2020 - Close to 2000 Australian employees of struggling US miner Peabody Energy face a nervous Christmas after the coal giant flagged plans to lower production and costs at local mines as part of efforts to avoid a second descent into bankruptcy.
Peabody warned on Tuesday it would default on debt within 51 days if lenders refused to accept an Australian focused refinancing plan dubbed “project Gibraltar”.
Peabody revealed on Tuesday it lost $US67.2 million ($92.3 million) in the three months to September 30; the fifth consecutive quarter in which the heavily indebted company had lost money amid a severe slump in coal prices.
Jobs have already been lost at Peabody's Australian mines this year and president Glenn Kellow said on Tuesday that weak demand had convinced him to idle more of his fleet at Queensland's Moorvale mine.
Mr Kellow also flagged that talks were underway with employees and customers at the Metropolitan mine in NSW in a bid to keep it open through the downturn.
The workplace agreement for the Metropolitan mine expires in January, and Peabody has told unions it wants much more flexibility in its next agreement.
The Construction Forestry Maritime Mining and Energy Union's representative in the Illawarra region, Bob Timbs, said employees were sensitive to Peabody's plight.
"Our members in the CFMEU understand the position the coal industry and Peabody is in at the moment, so sensible heads will get a deal," he said.
Australia has been both the source of Peabody's problems and its only hope of a viable future over the past decade.
The $4.9 billion debt-funded takeover of Australian miner Macarthur Coal in 2011 has been the main cause of Peabody's debt problems over the past five years, which culminated in Chapter 11 bankruptcy between April 2016 and April 2017.
But the Macarthur Coal transaction also gave Peabody a cluster of Queensland coking coal mines that, through exposure to Asian steelmaking, have much better longer-term prospects than its thermal coal mines in the United States, which are structurally challenged by US power generators' shift away from fossil fuels.
The Wilpinjong thermal coal mine in New South Wales has been Peabody's most profitable asset since an underground fire forced Queensland's North Goonyella mine to shut, and Wilpinjong is now central to Peabody's survival bid.
Wilpinjong has continued to make money this year despite 60 per cent of the world's coal mines being in the red, and Peabody is trying to seize upon that robust financial performance by legally separating Wilpinjong from the rest of the company and using the wholly owned subsidiary to raise new debt.
Peabody has asked the lenders behind its $US565 million revolving credit facility and holders of $US459 million of notes due in 2022 to forgo 15 percent of the monies they are owed, under a deal that would see new debt issued on longer maturities.
Much of that debt – Peabody's total current debts stand at $US1.6 billion – is trading in secondary markets at about 50 percent of its face value.
If Peabody can strike an agreement with lenders behind the revolving facility and the notes, a second group of lenders that provided the company's surety bonds for mine rehabilitation have indicated that they are willing to restructure the money they are owed by Peabody.
But Peabody said the first group of lenders had responded with their own proposals, dubbed "Project Oz", which were unacceptable to the miner, raising the risk that Peabody could breach its covenant and default next month.
''If the company is not able to timely, successfully, or efficiently implement the strategies that it is pursuing to address those risks and improve its liquidity and financial position, or otherwise meet its liquidity needs, the company may need to voluntarily pursue an in-court restructuring,'' said Peabody on Tuesday morning Australian time.
''The combined risks associated with the company’s recent financial results, market conditions, additional collateral demands and potential credit agreement non-compliance raise substantial doubt about whether the company will meet its obligations as they become due.''
Peabody's reference to an "in-court restructuring" hints at another round of Chapter 11 bankruptcy proceedings in the US, less than four years after the US-based company exited a Chapter 11 bankruptcy process in April 2017.
On that occasion Peabody was the highest profile failure of the global coal price slump that persisted between 2013 and early 2016.
While some of Wilpinjong's coal is exported, the majority is burned by AGL Energy at its Bayswater and Liddell power stations to provide electricity for Australia's eastern states.
Peabody has now racked up $US2.11 billion of cumulative losses over the past 15 months, with non-cash impairments responsible for about $US1.4 billion of that.
Peabody's New York traded shares were worth almost $US47 in June 2018, but the stock was fetching just $US1.08 on Monday, having lost 8 per cent of their value during Monday's trading session in the US.
The lenders and noteholders are represented by Houlihan Lokey and Freshfields lawyers among others. Peabody is being advised by Lazard.
Peabody's struggle to refinance and avoid covenants comes in the same year that ASX listed Whitehaven Coal refinanced its debt and secured a waiver from covenants.
Rival ASX listed miner Coronado Global Resources also secured covenant relief and conducted and equity raising to survive the downturn.