Refinancing a car loan can be confusing. But renegotiating the debt held by the country’s largest coal company is even more convoluted.
On Christmas Eve, coal giant Peabody Energy announced it had reached an agreement with creditors to refinance a majority of its debt.
Peabody Energy is the leading coal operator in Wyoming. It owns the North Antelope Rochelle, Rawhide and Caballo mines in the Powder River Basin and employs about 1,300 Wyoming miners.
But thermal coal production at its facilities in Wyoming was roughly a quarter less this year when compared to 2019. Revenue was down too. Demand for coal has been declining for about a decade. But the COVID-19 pandemic became the main culprit of depressed market conditions this year. Industrial demand for electricity has waned with stay-at-home orders and a constricted economy.
Energy analysts predict Thursday’s big agreement helped the publicly traded company avert bankruptcy. But the deal was also just one more sign of the uncertainty plaguing mining communities in the Wyoming coal country.
‘Kicking the can down the road’
As part of the financial solution reached with creditors last week, Peabody Energy will have a new due date for a majority of its loans — pushing the payback date from 2022 to the end of 2024.
Extending the debt maturities essentially buys Peabody Energy a few years of financial flexibility, or time to come up with the cash it needs to pay off what it owes.
Put another way, the agreement gives the company somewhat of a grace period to try to establish a more profitable business model for greater cash flow, and ride out weak market conditions, before having to make principal payments.
“Closing of the exchange transaction will provide Peabody with the flexibility needed to continue to pursue operational improvements across our operations as well as capture potential seaborne met and thermal market improvements,” Glenn Kellow, Peabody’s chief executive officer and president, said in a statement Thursday.
Under the $1.5 billion capital structure agreed upon Thursday, Peabody will exchange a portion of its revolving credit facility commitment and its 2022 senior notes for fresh loans due instead in late 2024. The company will also take on additional credit.
A leverage covenant hanging over the company was also lifted thanks to the agreement.
University of Wyoming economist Rob Godby described the covenant as a threshold set by creditors to limit how much debt Peabody Energy takes on.
In recent months the coal operator had taken on too much debt when it took on additional bonding to cover reclamation, or cleanup, obligations in violation of the agreement established with creditors.
To Godby, the whole package helps Peabody Energy avoid financial catastrophe.
“If they didn’t come to an agreement with creditors, it was looking very much like they would be going back into bankruptcy,” Godby said. “It didn’t look like there was any way they could make their 2022 obligations.”
Another deal reached in November between Peabody Energy and surety holders will also remain intact under the latest plan, according to a U.S. Securities and Exchange Commission filing. Peabody Energy holds about $1.6 billion in surety bonds.
But there is a cost that comes with Thursday’s deal. For one, the interest on some of the loans will go up. But the extra time could help the company, which is limping after a brutal year in coal production.
“This is a case of a company under stress,” said Clark Williams-Derry, an energy finance analyst for the Institute for Energy Economics and Financial Analysis. “They’re buying a few years, hoping that coal markets will recover and that the company can avoid a financial meltdown.”
But ultimately, Peabody is “kicking the can down the road,” he added. “In this case, it buys them two or three more years worth of road.”
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