NEW YORK, March 20 (IFR) - Investors in the new USD350m
payment-in-kind (PIK) bond from Walter Energy are nursing big
losses after the risky security dropped six points immediately
The bond plummeted on Wednesday to 94 in cash terms and
stayed down around the same level in the after market Thursday,
leading bankers to say the trade had been mispriced.
The six-year PIK toggle, part of the coal company's plan to
push out its debt maturities, priced at par with a 11% cash
coupon and 12% PIK via left lead Morgan Stanley.
Barclays, Citi, Credit Agricole, Goldman Sachs, JP Morgan
and Scotia were also bookrunners on the deal.
The yield-to-worst jumped to around 13.6% after the price of
the bond fell - a level at which the PIK should have initially
priced, one observer said.
"The deal was mispriced and jammed. There is no other
explanation. Bonds only drop like that on the break when they
have been poorly allocated," said one observer.
Morgan Stanley declined to comment on the PIK's performance,
or to offer any further clarity on how they arrived at the
pricing levels, demand for the deal, or any details on how it
Walter Energy declined to comment.
Others pointed to a negative equity research note published
by BofAML, which cut the price target on the stock to USD2 from
USD8 and contributed to a 20% fall in the company's share price
Given that the note was published on Thursday, however, does
not explain Wednesday's bond performance and the general
consensus was that market conditions were unlikely to have been
Indeed, other new high-yield issues have been trading up -
including Walter's USD200m first lien add-on, which priced
alongside the PIK at 101.5. Multiplan's USD1bn bond, for
example, carrying similar Triple C ratings and having priced on
Tuesday at par, was bid at 102.5.
Two investors said left-lead Morgan Stanley had told some
portfolio managers that they would only get allocation on the
add-on, which was doubled in size, if they also bought the PIK.
"That's how it looks to me," said one investor, who played
in the PIK.
"Some investors have clearly sold it immediately, and that's
why it has fallen so dramatically."
He said the 12% PIK coupon had looked very attractive,
offering a chance to get exposure to a rare name after recent
high-yield deals from sector peers Westmoreland and Arch Coal.
"We just have to move on," the investor said.
Overall, of course, the coal industry faces some tough
headwinds that have already hurt liquidity. For metallurgical
coal companies like Walter Energy, weak global steel production
has been the Achilles heel.
"The company is very sensitive to met coal, which is very
sensitive to the slowdown in China. Walter was essentially
terming out loans to give themselves enough time for that cycle
to turn (if they're lucky)," said another investor.
Analysts at CreditSights recently said Walter was in the
worst shape of the coal producers it covers, with 2.4 years of
cash at its projected burn rate without tapping its revolver.
According to them, Walter Energy had a cash balance of
USD261m in the fourth quarter of 2013, and they assume a
negative USD109m free cash flow in their analysis.
And overall, they are bearish on the sector.
"We are continuing our long-held view that coal producers
will underperform the broad HY corporate bond averages and would
prefer to miss the upturn in coal prices than risk further
downside in the bonds," the analysts said in a note.
The uncertain outlook had already unnerved some of the
company's lenders, as some decided not to extend the maturity of
the revolver - a move that three market sources said was very
According to Moody's, only 82% of the revolver lenders voted
for the amendment, which means the size of the facility will
shrink to USD314m from USD375m until April 2016, and to USD245m
until October 2017.
New leverage covenants on the revolver could also make it
difficult for the company to use unless its situation improves.
Thus, even though Walter has pushed out its debt maturities
to 2018, its liquidity position is still fragile.
"The company will generate negative free cash flows absent a
meaningful recovery in metallurgical coal markets. In addition,
if metallurgical coal prices remain weak, the revolver's
covenants could restrict availability," Moody's said.
Even so, Walter has won itself some breathing space with the
USD550m bond deals under its belt.
Indeed, the sale of the second lien PIK - which sits in the
company's capital structure between its first lien 9.5% bonds
and unsecured 2020 and 2021 bonds, yielding a massive 14-15% -
was crucial to refinancing plans.
Before even getting to this stage, the company had to first
get an amendment allowing it to repay its roughly USD406m Term
Loan A maturing over the next two years, without having to
refinance its Term Loan B maturing in 2018.
The proceeds from the new bonds will repay the TLA, and will
now allow for the company's revolver to be extended by 18
(Reporting by Natalie Harrison; Editing by Marc Carnegie and