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Related Issuers
Rating Action:

Moody's downgrades Peabody to Ba2; outlook stable

21 Aug 2013

Approximately $6 billion in rated debt affected

New York, August 21, 2013 -- Moody's today downgraded the ratings of Peabody Energy Corporation (Peabody), including its Corporate Family Rating (CFR) to Ba2 from Ba1; Probability of Default Rating (PDR) to Ba2-PD from Ba1-PD; senior unsecured rating to Ba2 from Ba1, and subordinated debt rating to B1 from Ba3. We also changed Speculative Grade Liquidity (SGL) rating to SGL-2 from SGL-1. The outlook is stable.

RATINGS RATIONALE

The downgrade reflects the prolonged weak industry conditions for metallurgical and thermal coal, with little improvement expected over the next 12-18 months. At this level, we expect Peabody's credit metrics to deteriorate in 2013 over 2012 levels, and weaken further in 2014, as higher-priced thermal contracts expire and the low met coal prices persist. We anticipate that Debt/ EBITDA, as adjusted by Moody's, will range from 5x -- 7x over the next twelve to eighteen months. We expect operating cash flows less capex in the $200 million range in 2013, and to approach zero in 2014 at our pricing assumptions.

Over the next twelve to eighteen months, we anticipate modest volume growth in the company's PRB operations, along with some spot price recovery, driven by higher natural gas prices and secular decline of Central Appalachian coal. But average realizations in Peabody's US thermal division will decline, as higher-priced contracts expire. We also anticipate revenue and EBITDA generated by Peabody's Australian business to decline in 2014, due to lower metallurgical and seaborne thermal coal prices. We expect that benchmark settlement prices for high quality metallurgical coal will improve as compared to the recent $145 settlement, but will remain below $160, due to additional supplies coming online worldwide and persistently weak demand from the global steel industry. We expect that these weak prices will challenge Peabody's Australian mines, despite the company's efforts to contain costs and improve productivity.

The Ba2 corporate family rating continues to reflect Peabody's significant size and scale, broadly diversified reserves and production base, efficient surface mining operations, and a solid portfolio of long-term coal supply agreements with electric utilities. The rating also reflects the company's healthy margins, organic growth opportunities, and strong management. Challenges for the rating include challenges facing the US coal industry, the potential volatility of the company's Australian operations due to its exposure to metallurgical coal, foreign currency fluctuations, operational risks inherent in the coal industry, and persistent cost pressures.

The company's Speculative Grade Liquidity Rating of SGL-2 reflects Peabody's cash on hand and substantial revolver capacity. Peabody has over $500 million in cash and cash equivalents, and almost full availability of its $1.5 billion revolving credit facility, which matures in 2015. Peabody's next significant maturity, $352 million from its term loan facility, comes due in 2015, followed by roughly $1.4 billion in term loans and notes in 2016. While we expect Peabody to be able to access its revolver if necessary, we believe headroom under covenants could get tight in the second half of 2014. Peabody has several alternatives for arranging back-door liquidity if necessary. Peabody's large number of mines and its operational diversity across the PRB and Illinois Basin give it the flexibility to sell non-core assets if necessary.

The stable outlook reflects our expectation that continued recovery in met prices over the medium term, along with cost containment, will offer support to the company's credit metrics and return Debt/ EBITDA, as adjusted, to levels below 6x on a sustainable basis.

Although upgrade is unlikely in the near term, ratings could be upgraded if Debt/ EBITDA, as adjusted, was expected to fall below 4x on sustainable basis.

A downgrade would be considered if liquidity position deteriorated, Debt/ EBITDA was expected to exceed 6x on sustainable basis, free cash flows were persistently negative, and/or debt capitalization ratio was expected to track above 65%.

The principal methodology used in this rating was Global Mining Industry published in May 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Peabody Energy Corporation is the world's largest private sector coal company with 28 coal mining operations in the US and Australia and approximately 9 billion tons of proven and probable reserves. In 2012 the company sold 249 million tons of coal and generated $7.9 billion in revenues.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Anna Zubets-Anderson
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's downgrades Peabody to Ba2; outlook stable
No Related Data.
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