NEW YORK, June 6 (IFR) - While the bonds of top US coal
producers plunged as news surfaced of proposed new carbon
emissions limits, much of the sector's debt is struggling for
very different reasons.
Bad bets on so-called met coal, which ballooned leverage
levels, have left many producers burning through cash and
battling to survive - even before the latest developments.
"It makes good headlines that the EPA is choking off jobs
and killing the coal industry," said Matthew Vittorioso, credit
analyst at Barclays.
"But the real immediate issues pressuring coal companies are
cheap and abundant natural gas [replacing the use of thermal
coal] and over-leveraged balance sheets."
Bonds from Walter Energy, Alpha Natural Resources and Arch
Coal were well under par even before the EPA's emissions
proposals were released this week.
Alpha's 6% 2019s, which were around a 78.00 dollar price on
May 15, were already down to about 69.00 by the time the
proposals came out.
Arch Coal's 7.25% 2021s went from 78.25 bid on May 12 to
69.5 on Monday, while Walter Energy's 11% 2020s are down from
87.50 mid-May to 73-74.00 earlier this week.
"Coal companies' bonds have dropped by about seven points in
price since mid-May in anticipation of the EPA regulations,"
said Jon Sablowsky, head trader at Brownstone Investment Group.
"But the fact that the price of met coal has dropped well
below production costs, which has caused companies like Arch and
Alpha to eat up their liquidity, has been more of an overhang
for these credits than the EPA news," he said.
Many coal companies have been caught out by their exposure
to metallurgical or 'met' coal, which is used to make steel.
Met coal prices surged in 2011 as companies leveraged up to
buy met coal assets, believing the demand for steel would keep
rising in tandem with China's economic boom.
But with met coal prices down more than 50 percent since
then, that exposure has put companies in very difficult
"Some of these coal companies paid high prices for met coal
assets when met coal prices were at US$250 per tonne or more,
but now that price is US$112 - lower than the cost of production
in some cases," said Vittorioso at Barclays.
"If met coal prices don't recover, EPA regulations won't
BURNING CASH, NOT COAL
According to CreditSights, the continued weakness in the met
coal market since March has erased about a year off the length
of time that Walter, Alpha and Arch's liquidity will last.
"Walter remains in the worst shape ... with 1.4 years of
cash at the projected burn rate, while Alpha and Arch have 3.7
years and 3.3 years of cash, respectively," it said.
Walter and Alpha have extended their lifespan by issuing
more debt to build liquidity, but the structuring and placement
of the added debt has smacked a bit of desperation.
The drop in Alpha's senior unsecured bond prices happened
when the EPA was dominating headlines in the sector, for
example, but it also coincided with the company's issue of a
US$400m second-lien note in mid-May, which pushed its senior
unsecured bondholders down a rung in the capital structure.
To take another example, Walter Energy's US$350m 11% April
2020 payment-in-kind (PIK) deal in March traded poorly from the
start, plunging six points in price on the break.
Two investors said left-lead Morgan Stanley had told some
portfolio managers that they would only get allocation on a
US$200m first lien add-on, which was issued by Walter at the
same time, if they also bought into the PIK.
Amid the current turmoil, of course, some investors are
starting to see an opportunity to get into the sector.
With the hunt for yield still strong in the market overall,
the double-digit yields on these coal bonds will look attractive
at lower prices - at least as long as the companies' liquidity
"I think their liquidity is adequate for the near to
intermediate term, so I would be watching for an entry point
when I feel the selling pressure has abated," said Sablowsky.
"I'd say the entry point has already been reached on
Walter's bond prices, and Arch and Alpha have another two or
three more points of downside in the near term."
(Reporting by Danielle Robinson; Editing by Marc Carnegie and