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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.
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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's CFR to B3, outlook negative
No Related Data.
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