JOHANNESBURG (miningweekly.com) – Moody's on Friday reported that it had downgraded the ratings of NYSE-listed coal company Peabody Energy Corporation, reflecting the ratings agency’s expectation of continued deterioration in the company's credit metrics, owing to the ongoing decline in the seaborne metallurgical (met) coal markets.
“The negative outlook reflects our expectation that met coal markets will remain weak over the next 18 months, while the company's Debt/ earnings before interest, taxes, depreciation and amortisation (Ebitda), as adjusted, will approach 9x in 2015,” stated Moody’s, pointing out that a ratings upgrade was unlikely. However, this would be considered if Debt/Ebitda were to approach 6x, with roughly neutral free cash flows.
Moody’s did anticipate some recovery in 2016, but still expected the leverage to remain elevated at around 7x.
Alternatively, a further downgrade would be considered if liquidity deteriorated, free cash flows were persistently negative and/or Debt/Ebitda exceeded 8x on a sustained basis.
Moody’s downgraded the St Louis, Missouri-headquartered company’s corporate family rating (CFR) to B3 from B2, which continued to reflect pressures on Peabody’s US thermal coal business from increased regulatory pressure and low natural gas prices.
“That said, Peabody's rating reflects its significant size and scale, broadly diversified reserves and production base, efficient surface mining operations and a solid portfolio of long-term coal supply agreements with electric utilities. The rating also incorporates its competitive cost structure compared with other US-based producers, as well as operational risks inherent in the coal industry,” Moody’s added.
Further, the probability of default rating (PDR) was downgraded to B3-PD from B2-PD, the senior secured credit facility to B1 from Ba3 and second lien debt to B3 from B2, while the ratings on senior unsecured notes were downgraded to Caa1 from B3 and junior subordinated debenture to Caa2 from Caa1. Moody's also changed the speculative grade liquidity rating to SGL-3 from SGL-2.
The agency explained that the B1 rating on the secured facility, two notches above the B3 CFR, reflected the security provided by the collateral package, which included a claim on certain US properties and various stock pledges. The B3 rating on the second lien notes, in line with the CFR, reflected their relative position in the capital structure with respect to claim on collateral, behind the senior secured credit facility but ahead of the Caa1 rated unsecured notes and Caa2 subordinated debentures.
The speculative grade liquidity rating of SGL-3 reflects adequate liquidity, including cash and cash equivalents of $637-million, $1.5-billion available under the $1.65-billion revolver and $34-million of available capacity under the accounts receivable securitisation programme as of March 31, 2015.
“We expect Peabody to be in compliance with the covenants under its secured credit facility, although headroom under covenants is expected to tighten,” Moody’s commented.
Peabody had several alternatives for arranging back-door liquidity if required, as its large number of mines and its operational diversity across the PRB and Illinois basin gave it the flexibility to sell noncore assets.
Absent asset sales, Moody’s expected Peabody to generate negative free cash flows in 2015 and 2016.
MET COAL OUTLOOK
Benchmark prices for high-quality met coal for the third quarter of 2015 settled at $93 a metric ton. The second quarter benchmark of $110 was already tracking roughly $10 below the settlements from the past four quarters.
“Once supply cuts take effect, we expect prices to improve somewhat; however, any material recovery is increasingly appearing unlikely over the next 18 months,” said Moody’s.
The ratings agency estimated that the about 300-million-ton seaborne market was currently oversupplied by roughly 5% to 10%, with global suppliers, mostly in Australia and the US, having already announced supply cuts of over 30-million metric tonnes since early 2014.
However, these were slow to take hold, Moody’s noted.
Production volumes were also being propped up by cost curves shifting lower, owing to falling oil prices and currencies weakening against the US dollar, particularly the Australian dollar, the source of over half of global met coal production.
“Despite the downward trend of the global cost curve, we believe a significant portion of global met coal production remains uneconomic and further production cuts will be necessary to bring the markets back into balance,” Moody’s warned.