| CHICAGO/WILMINGTON, Del.
CHICAGO/WILMINGTON, Del. A year ago, Peabody Energy Corp's (BTUUQ.PK) chief executive was presiding over $2 billion of losses as the world's largest private sector coal miner spiraled into bankruptcy.
Now, CEO Glenn Kellow and other top executives stand to reap tens of millions of dollars in stock bonuses under Peabody's bankruptcy exit plan, which sets aside 10 percent of newly minted shares for employees.
The executives would collect a big portion of that stock when the company exits bankruptcy, expected in April. The shares would be worth about $15 million for Kellow and between $3 million and $5 million for each of five other executives, according to a company estimate.
But some shareholders and creditors who are challenging Peabody in bankruptcy court say the executives could reap a much bigger windfall. That's because Peabody's estimate severely undervalues the stock, they argue.
The company's valuation, they contend, fails to properly reflect the impact of President Donald Trump's unexpected election victory and regulatory changes in Beijing that have stoked demand for coal in China.
The critics include hold-out creditors who complain they are getting shorted by a deal hammered out by Peabody executives and hedge funds that hold the bulk of the company's debt, which totals about $8 billion. The funds - led by Elliott Management, Discovery Capital Management and Aurelius Capital Management - would benefit from a lower valuation because it would give them more shares of the newly created Peabody stock, which will be used to pay off their bonds.
"You'd think this was one of the hottest IPOs in the world," said Fredrick Palmer, who retired from Peabody in 2014 as a senior vice president and will be left with Peabody's old and essentially worthless stock.
Some shareholders and creditors are expected to oppose Peabody's Chapter 11 exit plan when the company seeks approval from the U.S. Bankruptcy Court in St. Louis in March.
By any estimate, the stock in Peabody's management incentive plan is unusually valuable for a bankrupt company.
Peabody predicts it will be worth $310 million based on a $3.1 billion market capitalization, a figure the company said is appropriate given the volatile nature of global commodity markets.
Critics contend the stock could be worth up to three times that amount. Palmer estimates the initial stock award to Kellow could be worth as much as $43.5 million. That would top all restricted stock grants in 2015 by U.S. public companies with at least $1 billion in revenue, according to a survey by the Equilar consulting firm.
Peabody spokesman Vic Svec disputed Palmer's estimate and said that one-time bankruptcy exit awards should not be compared with other companies' annual stock grants. Peabody followed widely accepted pay practices for companies in Chapter 11, Svec said, and offers stock grants to all 7,000 of its employees.
Companies emerging from bankruptcy generally give stock to executives to align the interests of management with new shareholders, who are usually former creditors. The percentage of stock being granted to Peabody executives is standard for a company exiting Chapter 11, according to John Dempsey, a partner at the Mercer consulting firm.
AN UNLIKELY RALLY IN COAL
The potentially high stock value stems from an unexpectedly positive near-term outlook for the coal industry, based in part on Trump's promises of deregulation.
"Many coal companies were convinced that Hillary Clinton would seek to destroy the industry," said Nathan Yates, director of research at Forward View Consulting.
For a bankrupt company, Peabody has drawn unusually high interest among investors. The company's bonds rallied in recent months, and the miner was able to easily raise money in financial markets. Creditors including the Appaloosa Management hedge fund sued so they could get access to Peabody's new stock.
Prices for seaborne coal, which Peabody produces from Australian mines, rose sharply in the second half of last year, driven by higher demand from China after the government there closed money-losing coal mines. That sparked a rally in the shares of miners such as Cloud Peak Energy Inc (CLD.N) and Australia's Whitehaven Coal Ltd (WHC.AX).
Long-term prospects for the coal industry, however, remain uncertain. The Chinese government has for years worked toward cleaner energy to ease choking smog in cities and is now considering cuts to coal-consuming heavy industries.
It also remains unclear how Trump policy changes would make coal cheaper than abundant U.S. natural gas.
At Peabody's estimated value, the company would start trading with a market capitalization just below the industry leader, CONSOL Energy Inc (CNX.N), which is shifting from coal to natural gas production.
Kellow and his management team will have to wait one year before they can sell a portion of their incentive-plan stock and three years before they can sell all of it.
SURVIVING CHAPTER 11
Surviving the bankruptcy at all is a victory for Peabody executives. Top managers are often shown the door when a company declares Chapter 11.
Many energy producers, however, retained executives during the recent wave of industry bankruptcies, which many boards of directors blamed on a once-in-a-generation price collapse rather than mismanagement.
Kellow joined Peabody from BHP Billiton Ltd (BHP.AX) in 2013 and took the helm in May 2015, after the industry had slumped on weak China demand and a shift by U.S. power plants away from coal to cheap natural gas.
In his first three years, as the company stumbled, the board awarded Kellow restricted stock worth a combined $6.58 million, as part of his overall pay of $14.37 million.
Those shares were rendered essentially worthless by the bankruptcy, but the company replaced much of the lost compensation with a plan that could allow up to $11.9 million in cash bonuses for executives, including up to about $4 million for Kellow.
The cash bonuses would be paid in addition to the stock awards that executives stand to collect. Peabody said the cash bonus plan, which is based on 2016 and 2017 performance benchmarks, was in line with other bankrupt companies.
For both the stock and cash incentives, creditors had the chance to object when the plans were negotiated, said Jonathan Lipson, a professor at Temple Law School.
"The creditors apparently accepted it," he said, "and it's their money."
(Reporting by Tracy Rucisnki and Tom Hals; Editing by Noeleen Walder and Brian Thevenot)