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Rating Action:

Moody's revises Peabody Energy's rating outlook to negative; affirms Ba3 CFR

24 Feb 2020

New York, February 24, 2020 -- Moody's Investors Service, ("Moody's") affirmed Peabody Energy Corporation's Ba3 Corporate Family Rating and revised the rating outlook to negative from stable.

"Peabody's rating is threatened by weak industry fundamentals and emerging access to capital issues driven by investors' ESG concerns," said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for Peabody Energy Corporation.

Affirmations:

..Issuer: Peabody Energy Corporation

.... Probability of Default Rating, Affirmed Ba3-PD

.... Corporate Family Rating, Affirmed Ba3

....Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD3)

..Issuer: Peabody Securities Finance Corporation

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

Outlook Actions:

..Issuer: Peabody Energy Corporation

....Outlook, Changed To Negative From Stable

..Issuer: Peabody Securities Finance Corporation

....Outlook, Changed To Negative From No Outlook

RATINGS RATIONALE

Moody's expects that EBITDA will fall to about $450-500 million (from $837 million in 2019) and the company will struggle to generate free cash flow in 2020. Thermal and metallurgical coal pricing fell sharply in 2019 with weak market conditions expected to persist in 2020. 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 likely will soften and become stretched for the rating, including adjusted financial leverage moving toward 3.0x (Debt/EBITDA). However, management responded aggressively in early 2020 with a series of actions to preserve cash, including scaling back capital spending to $250 million in 2020, and it has a good liquidity position. Peabody also reported $732 million of balance sheet cash at 31 December 2019.

Moody's also believes that investor concerns about the coal industry's ESG profile are intensifying and coal producers will be increasingly challenged by intensifying access to capital issues 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.

Moody's affirmed Peabody's Ba3 CFR based on expectations for: (i) operational actions sufficient to avoid meaningful cash consumption in 2020; (iii) meaningful progress towards reducing costs associated with North Goonyella metallurgical coal mine and potentially sell the asset; and (iii) move toward more conservative financial policies in the medium term and take the actions necessary to reduce debt levels. Management announced during its fourth quarter earnings call that it would suspend its dividend to shareholders, eliminate share repurchases, and reduce debt from $1.3 billion reported on 31 December 2019. However, it returned more than $1.6 billion of cash to shareholders over the past two and a half years, including an acceleration of share repurchase activity in the second half of 2019. The company's equity is trading about 80% below peak levels and market capitalization has fallen below $1 billion. The rating affirmation considers favorably the company's business diversity compared to most rated coal peers and greater ability to make operational and financial adjustments. A potential joint venture with Arch Coal that would combine both companies' western assets and generate meaningful cost-related synergies is not fully incorporated into the rating today because it has not been approved by regulatory authorities.

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 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.

The negative outlook reflects expectations for weaker cash flow generation in 2020 and uncertainties related to pending and potential transactions. An upgrade is not likely given the inherent volatility in the global metallurgical coal industry, ongoing secular decline in demand for US thermal coal, and intensifying ESG concerns. However, 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 rating with expectations for adjusted financial leverage above 3.0x (Debt/EBITDA), negative free cash flow, substantive deterioration in liquidity, or further intensification of ESG concerns that call into question the company's ability to handle upcoming financing requirements.

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 early 2020 following an abandoned bond deal in late 2019, followed by turnover in financial management, revision of financial policies, and the company's announcement that it would nominate three potential directors from an activist shareholder.

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. The liquidity rating will 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 remains subject to regulatory approvals; 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.

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. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

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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