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Rating Action:

Moody's downgrades Peabody Energy's CFR to B1; outlook negative

17 Apr 2020

New York, April 17, 2020 -- Moody's Investors Service, ("Moody's") downgraded long-term ratings for Peabody Energy Corporation, including the Corporate Family Rating ("CFR") to B1 from Ba3 and senior secured ratings to B1 from Ba3, based on expectations for weakened earnings and cash flow. The rating outlook is negative.

"Peabody has about $1 billion of cash on the balance sheet today, but cash usage in 2020 is expected due to deteriorating demand for coal and weak export conditions, coupled with a deteriorating global economic outlook" said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for Peabody Energy Corporation.

Downgrades:

..Issuer: Peabody Energy Corporation

.... Corporate Family Rating, Downgraded to B1 from Ba3

.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD

....Senior Secured Revolving Credit Facility, Downgraded to B1 (LGD3) from Ba3 (LGD3)

....Senior Secured 1st Lien Term Loan, Downgraded to B1 (LGD3) from Ba3 (LGD3)

..Issuer: Peabody Securities Finance Corporation

....Senior Secured Regular Bond/Debenture, Downgraded to B1 (LGD3) from Ba3 (LGD3)

Outlook Actions:

..Issuer: Peabody Energy Corporation

....Outlook, Remains Negative

..Issuer: Peabody Securities Finance Corporation

....Outlook, Remains Negative

Peabody Securities Finance Corporation is the issuing entity and later merged into Peabody Energy Corporation.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The coal sector has been one of the sectors most significantly affected by the shock given its sensitivity to industrial demand and sentiment. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Peabody's exposure to the breadth and severity of the shock.

Moody's expects a very challenging year for the coal industry in 2020 -- including meaningful reduction in industry-wide demand for metallurgical coal and thermal coal in the next few months driven by an unprecedented shock to the economy due to the coronavirus outbreaks. Moody's expects that demand for steel will fall, causing steel producers to idle blast furnaces and reduce consumption of met coal, and demand for electricity will also fall, causing coal-fired power plants to delay and/or reduce volumes for thermal coal even though much of the industry's anticipated sales volume for 2020 is contracted today. In response to weakened market conditions, Peabody has taken aggressive operational and financial actions to preserve liquidity. Moody's also notes that Peabody's mines remain operating today despite widespread idling of mining operations by competitors.

Before the outbreak of coronavirus, Moody's expected that EBITDA would fall to about $450-500 million (from $837 million in 2019). The company will struggle to generate free cash flow in 2020. This forecast incorporated a series of actions taken to preserve cash, including scaling back capital spending to $250 million in 2020. Now, Moody's expects that EBITDA will fall into the range of $375-400 million and, absent the benefit of one-time actions, will likely have cash usage in 2020. Weak market conditions for export coals are expected to continue in the near term. Export thermal coal pricing is anticipated near the lower bound of our medium-term sensitivity range of $60-90 per metric ton (Newcastle) and export metallurgical near the midpoint of our range of $110-170 per ton (CFR Jingtang) in 2020. Credit metrics calculated using gross debt will weaken, including adjusted financial leverage moving well above 3.0x (Debt/EBITDA). However, Moody's will take into consideration the company's excess cash position, especially after the $300 million temporary draw-down under the revolving credit facility.

Moody's also believes that investor concerns related to the coal industry's ESG profile are intensifying and limit the industry's ability to respond to market disruptions in the near term. Access to capital is expected to narrow further in the early 2020s. An increasing portion of the global investment community is reducing or eliminating exposure to the coal industry with greater emphasis on moving away from thermal coal. The aggregate impact on the credit quality of the coal industry is that debt capital will become more expensive over this horizon, particularly in the public bond markets, and other business requirements such as surety bonds, which together will lead to much more focus on individual coal producers' ability to fund their operations and articulate clearly their approach to addressing environmental, social, and governance considerations -- including reducing net debt in the near-to-medium term. Peabody reported about $1.3 billion of debt and $1.4 billion of surety bonds to support reclamation-related items at 31 December 2019.

The B1 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 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. The rating also takes into consideration that some mining assets have less favorable operating prospects in the coming years and, therefore, could be subject to more significant reclamation-related spending over the rating horizon.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The negative outlook reflects risk associated with a weakening macroeconomic environment and upcoming debt maturities in 2022. Moody's could downgrade the rating with expectations for adjusted financial leverage above 3.5x (Debt/EBITDA), negative free cash flow in 2021, substantive deterioration in liquidity, or further intensification of ESG concerns that call into question the company's ability to handle upcoming financing requirements. Given the company's excess cash position, Moody's has tolerance for a modest increase in adjusted financial leverage beyond 3.5x on a temporary basis with a clear intent to repay debt to reduce leverage with improvement in the public health situation. Moody's could upgrade the rating with expectations for adjusted financial leverage sustained below 2.5x, meaningful reduction in absolute debt, sustained positive free cash flow, and successful refinancing of upcoming debt maturities.

Environmental, social, and governance factors have a material impact on 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 and announced that it will pursue a commercial process for North Goonyella. Governance-related risks have increased in early 2020 following change in CFO and the company's announcement that it would nominate two directors from its largest shareholder and one independent director. Peabody also returned substantial cash to shareholders over the past three years ($1.6 billion), including an acceleration of share repurchase activity as export markets weakened in late 2019.

The SGL-2 Speculative Grade Liquidity Rating ("SGL") reflects our expectation for good liquidity to support operations over the next 12-18 months. Peabody reported about $1.3 billion of available liquidity at 31 December 2019, including $732 million of balance sheet cash and availability under a $565 million revolving credit facility and $250 million accounts receivables securitization program. Both facilities are used to support letters of credit. Subsequent to the closing of the reporting period and in response to uncertainty related to the Coronavirus pandemic, the company drew $300 million on its revolving credit facility and holds pro forma cash in excess of $1 billion. Beyond the potential for weakened cash flow generation, the liquidity rating could be challenged by two specific scenarios: (i) potential need to obtain consent from bondholders to move forward with a proposed joint venture with Arch Coal, which will require litigation related to the deal's rejection by the US Federal Trade Commission; and (ii) a projected narrow cushion of compliance under the first lien secured leverage ratio test in the company's revolving credit facility. With a commercial process underway for the North Goonyella mine, near-term alternative sources of liquidity are potentially significant, though the amount and timing of any proceeds remains uncertain today, particularly in light of substantial economic and financial disruption in early 2020. The SGL also incorporates the benefits of Peabody's diverse operations, which give the company more assets with which to pursue leasing and other liquidity-enhancing transactions like many other companies in the coal industry, and substantial unencumbered operations in Australia.

Peabody Energy Corporation is a leading global pure-play coal producer with coal mining operations in the US and Australia and about 4 billion tons of proven and probable reserves. The company generated $4.6 billion in revenues in 2019.

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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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