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Rating Action:

Moody's assigns Ba3 rating to Peabody Energy's proposed secured notes

16 Sep 2019

New York, September 16, 2019 -- Moody's Investors Service ("Moody's") assigned a Ba3 rating to Peabody Energy Corporation's ("Peabody") proposed $900 million Senior Secured Notes. Proceeds from the offering, combined with funds from existing cash balances, will be used to repurchase and redeem approximately $1 billion of senior secured notes being tendered by the company.

"Peabody's revised deal structure will lower debt balances by about $100 million, extend debt maturities, and pave the way for the proposed joint venture with Arch Coal," said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for Peabody Energy Corporation.

Assignments:

..Issuer: Peabody Energy Corporation

....Senior Secured Regular Bond/Debenture, Assigned Ba3 (LGD3)

RATINGS RATIONALE

The ratings on the company's existing secured notes are expected to be withdrawn following the completion of the proposed transaction. In the event that existing secured debt remains following the refinancing transaction, Moody's will assess the extent to which the secured debt retains collateral support and covenant protection. Peabody indicated in an 8K filing that more than 95% of existing secured debt has been tendered. In addition, the proposed unsecured notes rated on 5 September 2019 were not issued and, therefore, the rating will be withdrawn.

The Ba3 CFR reflects a diverse platform of cost competitive assets in Australia and the United States, balancing strong credit metrics and cash flow generation in recent quarters with the inherent volatility of the metallurgical and export thermal coal markets and ongoing secular decline in the US thermal coal industry. Most of the company's US thermal coal produced in the United States is sold to domestic utilities and all the US-produced metallurgical coal is sold into the seaborne market. Most of the company's coal produced in Australia is sold into the seaborne thermal and metallurgical coal markets in Asia. Despite the diversity of the company's operations, a sharp and sustained decline in coal prices would have a meaningful impact on the company's earnings and cash flow, albeit with some lag based on contracted volumes. Like other rated coal producers, environmental and social factors have a material impact on the company's credit quality.

Moody's expects credit metrics will soften but remain solid for the rating in 2020, including an expected increase in adjusted financial leverage to above 2.0x (Debt/EBITDA). The rating incorporates expectations for the company to maintain solid credit metrics in a scenario involving export coal pricing at the mid-point of our medium term sensitivity ranges for export coal prices, including export thermal coal in the range of $60-90 per metric ton (Newcastle) and export metallurgical coal in the range of $110-170 per metric ton (CFR Jingtang). The rating assumes that credit metrics could become stretched, including adjusted financial leverage above 3.0x (Debt/EBITDA) if export coal pricing remained at the lower bound of our price ranges for more than a year, but the company would be able to limit cash consumption by scaling back capital spending to below $200 million and would still maintain good liquidity. Good liquidity to support operations is critical to maintaining credit quality in advance of such a scenario and, therefore, maintaining the Ba3 CFR and stable rating outlook.

Moody's expects that the company will remain aggressive with respect to shareholder returns in the near-term, but would scale back the program to maintain the Ba3 CFR. Peabody has returned more than $1.5 billion of cash to shareholders over the past two years. However, notwithstanding substantial shareholder returns, the company's equity is trading about 60% below peak levels and near a 52 week low. Management plans to accelerate share repurchase activity in the second half of 2019.

The SGL-2 Speculative Grade Liquidity Rating ("SGL") reflects good liquidity to support operations over the next 12-18 months. Peabody reported $850 million of cash at 30 June 2019 (about $675 million on a pro forma basis for the proposed transaction). The company expects it will also have access to an undrawn $565 million revolving credit facility (through 2020; $540 million through 2023) and undrawn $250 million accounts receivables securitization program. Moody's expects nearly $600 million of availability under these facilities after considering letters of credit. The existing revolving credit facility is expected to have net first lien leverage ratio covenant set at 2.0x. The amended first lien term loan is not expected to have any financial maintenance covenants. Given the recent weakness in export coal pricing, Moody's places greater emphasis on the cash component of the company's liquidity until there is evident stabilization in the export market. The SGL rating assumes that the company will maintain a robust cash balance regardless of the company's access to revolving credit.

Environmental, social, and governance factors are important factors influencing Peabody's credit quality. The company is exposed to ESG issues typical for a company in the coal mining industry, including increasing global demand for renewable energy that is detrimental to demand for coal, especially in the United States and Western Europe. From an environmental perspective the coal mining sector is also viewed as: (i) very high risk for air pollution and carbon regulations; (ii) high risk for soil and water pollution, land use restrictions, and natural and man-made hazards; and (iii) moderate risk for water shortages. Specific social issues with respect to Peabody include the future operational status of the company's North Goonyella metallurgical coal mine that is not operational following a mine fire. The company is in the process of resuming mining operations, but encountered delays with local authorities in Queensland.

The Ba3 rating assigned to the new senior secured notes reflects a first lien security interest in substantially all domestic assets and a 65% equity pledge from substantially all foreign assets. A meaningful contribution of EBITDA from the company's foreign subsidiaries, which could be leveraged in a downside scenario, creates some collateral weakness. However, secured debt represents the preponderance of debt in the company's capital structure and, therefore, all secured debt is rated on par with the Ba3 CFR.

The stable outlook assumes that Peabody will manage balance sheet debt in the company's target range of $1.2-$1.4 billion, maintain strong credit metrics, and good liquidity over the next 12-18 months. Moody's could upgrade the ratings with meaningful improvement in industry conditions, including a slowing or reversal of the rate of secular decline in the US thermal coal industry and greater stability in metallurgical coal markets. A material increase in scale and diversity, combined with expectations for positive free cash flow generation in a stressed pricing environment, could also have positive rating implications. Moody's could downgrade the ratings with expectations for adjusted financial leverage above 3.0x (Debt/EBITDA) or negative free cash flow. Given the recent weakness in export coal pricing and expectations for continued shareholder returns, a meaningful erosion in the company's liquidity position could have negative ratings implications.

The principal methodology used in these ratings was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Peabody Energy Corporation is a leading global pure-play coal producer with coal mining operations in the US and Australia and close to 5 billion tons of proven and probable reserves. The company generated over $5.2 billion in revenues for the twelve months ended June 30, 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Benjamin Nelson
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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