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Related Issuers
Rating Action:

Moody's downgrades Peabody's CFR to B3, outlook negative

Global Credit Research - 25 Jun 2015

NOTE: On June 26, 2015, the press release was corrected as follows: In the debt list “(Local Currency)” was removed from the Corporate Family Rating. Revised release follows.

New York, June 25, 2015 -- Moody's Investors Service today downgraded the ratings of Peabody Energy Corporation (Peabody), including the corporate family rating (CFR) to B3 from B2, probability of default rating (PDR) to B3-PD from B2-PD, the ratings on senior secured credit facility to B1 from Ba3, the ratings on second lien debt to B3 from B2, the ratings on senior unsecured notes to Caa1 from B3, and the junior subordinated debenture ratings to Caa2 from Caa1. Moody's also changed the speculative grade liquidity rating to SGL-3 from SGL-2. The outlook is negative.

Downgrades:

..Issuer: Peabody Energy Corporation

.... Corporate Family Rating, Downgraded to B3 from B2

.... Probability of Default Rating, Downgraded to B3-PD from B2-PD

.... Speculative Grade Liquidity Rating, Changed to SGL-3 from SGL-2

....Junior Subordinated Conv./Exch. Bond/Debenture (Local Currency) , Downgraded to Caa2, LGD6 from Caa1, LGD6

....Senior Secured Bank Credit Facility (Local Currency), Downgraded to B1, LGD2 from Ba3,LGD2

....Senior Secured Regular Bond/Debenture (Local Currency), Downgraded to B3, LGD3 from B2, LGD3

....Senior Unsecured Regular Bond/Debenture (Local Currency), Downgraded to Caa1, LGD5 from B3,LGD5

Outlook Actions:

..Issuer: Peabody Energy Corporation

....Outlook, Remains Negative

RATINGS RATIONALE

The downgrade reflects our expectation of continued deterioration in the company's credit metrics, more precipitous than we had forecasted previously, due to the ongoing decline in the seaborne metallurgical coal markets. We anticipate that the company's Debt/ EBITDA, as adjusted, will approach 9x in 2015. Although we anticipate some recovery in 2016, we expect the leverage to remain elevated at around 7x. Absent asset sales, the company will generate negative free cash flows in 2015 and 2016.

Benchmark prices for high quality met coal for the third quarter of 2015 settled at $93/ metric tonne. The second quarter benchmark of $110 was already tracking roughly $10 below the settlements from the past four quarters. Once supply cuts take effect, we expect prices to improve somewhat; however, any material recovery is increasingly appearing unlikely over the next 18 months. We estimate that the approximately 300 million-ton seaborne market is currently oversupplied by roughly 5%-10%. Global suppliers, mostly in Australia and the US, have already announced over 30 million metric tonnes of supply cuts since early 2014. However, these are slow to take hold. Production volumes are also being propped up by cost curves shifting lower, due to falling oil prices and currencies weakening against the US dollar, particularly the Australian dollar, the source of over half of global met coal production. Despite the downward trend of the global cost curve, we believe a significant portion of global met coal production remains uneconomic and further production cuts will be necessary to bring the markets back into balance.

The B3 corporate family rating continues to reflect pressures on the company's US thermal coal business from increased regulatory pressure and low natural gas prices. That said, Peabody's rating reflects its 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 incorporates its competitive cost structure compared to other US-based producers, as well as operational risks inherent in the coal industry.

The B1 rating on the secured facility, two notches above the B3 CFR, reflects the security provided by the collateral package, which includes a claim on certain US properties and various stock pledges. The B3 rating on the second lien notes, in line with the CFR, reflects their relative position in the capital structure with respect to claim on collateral, behind the senior secured credit facility but ahead of the Caa1 rated unsecured notes and Caa2 subordinated debentures.

The speculative grade liquidity rating of SGL-3 reflects adequate liquidity, including cash and cash equivalents of $637 million, $1.5 billion available under $1.65 billion revolver and $34 million of available capacity under the accounts receivable securitization program as of March 31, 2015. We expect Peabody to be in compliance with the covenants under its secured credit facility, although headroom under covenants is expected to tighten. 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 negative outlook reflects our expectation that metallurgical coal markets will remain weak over the next eighteen months, while the company's Debt/ EBITDA, as adjusted, will approach 9x in 2015.

A ratings upgrade is unlikely but would be considered if Debt/ EBITDA were to approach 6x, with roughly neutral free cash flows.

A further downgrade would be considered if liquidity deteriorated, free cash flows were persistently negative, and/or Debt/ EBITDA exceeded 8x on a sustained basis.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. 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.

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.
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SUBSCRIBERS: 212-553-1653

Moody's downgrades Peabody's CFR to B3, outlook negative
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