(c) 2013, Bloomberg News.
(c) 2013, Bloomberg News.
NEW YORK — Leverage at Peabody Energy Corp. is poised to almost double after a 62 percent drop in prices since January 2011 and a $5.1 billion acquisition leave the largest U.S. coal producer with more capacity than it needs.
Peabody's ratio of debt to earnings before interest, taxes, depreciation and amortization, which was 3.3 times last year, is expected to range from 5 times to 7 times over the next 18 months, according to Moody's Investors Service. Profitability has eroded as the company added reserves in Australia and "economic conditions" in Asia and Europe restricted demand, President and Chief Executive Officer Gregory Boyce said on a July 23 conference call with analysts and investors.
The price of metallurgical coal, used to produce steel and accounting for 27 percent of Peabody's sales, has fallen to $140.25 a ton from $365.83 on Jan. 21, 2011, according to the Coking Coal Queensland Index, squeezing profit margins at St. Louis-based Peabody. The current metallurgical coal market of about 1 billion metric tons is oversupplied by about 15 million to 25 million tons, according to data from Anglo American and Raymond James Financial Inc.
"The market is recalibrating and the problems plaguing the coal industry are going to continue indefinitely; clearly into 2014 if not further," Evan Mann, a bond analyst at GimmeCredit, said in a telephone interview. "Metallurgical coal is a big driver of profitability and leverage will creep up as Ebitda drops."
The coal miner has about $6.3 billion in debt, according to data compiled by Bloomberg. Its operating income plunged 58 percent, to $645 million for the 12 months ended June 30, compared with $1.52 billion a year prior, Bloomberg data show. Ebitda declined to $1.36 billion from $2.08 billion.
Peabody has paid down more than $630 million of debt since the beginning of 2012, Vic Svec, senior vice president of investor relations and corporate communications, wrote in an emailed statement.
Moody's cut its grade on Peabody to Ba2 from Ba1 on Aug. 21 because of "prolonged weak industry conditions" for metallurgical coal prices, while Standard & Poor's lowered its mark one level on Aug. 26, to an equivalent BB, citing higher leverage.
Peabody has about $1.16 billion in term loans due in 2015 and 2016 and a $1.5 billion line of credit that expires in June 2015, Bloomberg data show. The loans are its first debts to mature.
The loans require earnings before interest and taxes to be at least 2.5 times interest expense and a leverage maximum of 5.5 times for 2013, according to Fitch Ratings, which lowered its grade on Peabody to BB from BB+ on Aug. 22.
"Peabody's expected leverage metrics are not where we'd like to see a Ba1 rated company," Anna Zubets-Anderson, a senior credit analyst at Moody's in New York, said in a telephone interview. "To the extent we think they might not be producing that much cash, their liquidity position is weakened; and with leverage metrics and Ebitda deterioration we're expecting, the headroom on the covenants might tighten."
Peabody has the lowest absolute and the fourth-lowest relative borrowing costs among junk-rated U.S. coal miners, Bank of America Merrill Lynch index data show. Its average yield is 6.03 percent, while its premium to U.S. Treasury bonds is 4.22 percentage points, higher only than Foresight Energy at 2.3 percentage points, Cloud Peak Energy's 3.68-point spread and SunCoke Energy Partners's 4.2.
Junk, or high-yield, high-risk bonds, are rated below Baa3 at Moody's and BBB- at S&P.
Peabody's $1.34 billion of 6.25 percent bonds due in November 2021 have fallen 5.1 cents since July 22, the day before the company released second-quarter earnings, to 96.5 cents on the dollar to yield 6.8 percent, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
"The companies that are most levered are seeing the most volatility in their bonds," Mann said. "We see similar trends and bonds weakening in companies like Alpha Natural Resources and Consol."
Alpha Natural Resources Inc.'s $800 million of 6 percent bonds due in June 2019 have fallen 4.75 cents since July 22, to 85.75 cents on the dollar with a yield of 9.25 percent, according to Trace. The company's leverage was 3.55 on Dec. 31.
Peabody was founded in Chicago in 1883 as a retail coal brokerage by 24-year-old Francis S. Peabody, who had $100 in startup capital, a wagon and two mules, according to a timeline on the company's website. In 1955, it merged with Sinclair Coal Co. and moved its headquarters to St. Louis.
The company entered the Australian market in the 1960s. After changing hands a number of times, the company listed under ticker BTU on the New York Stock Exchange in 2001. In 2007 Peabody spun off operations and reserves in Central Appalachia, Northern Appalachia and the Illinois Basin to form Patriot Coal Corp., which filed for Chapter 11 protection in July 2012.
Peabody bought Brisbane, Australia-based Macarthur Coal in December 2011 to boost its reserves of metallurgical coal. Storms and flooding in Queensland reduced first-quarter 2012 earnings by about $50 million, the company said at the time.
The company exported more than 50 million tons of coal in 2012 to more than 25 countries, according to Svec. More than 30 million tons of exports came from its Australian and U.S. units, with the remainder from its global trading and brokerage activities.
Peabody's is targeting exports of 26 million to 28 million tons from its Australia division this year, with 15 million to 16 million of metallurgical coal exports, Svec said. The primary destinations for metallurgical coal are steel-producing countries in Asia and Europe, including Japan, South Korea, China and Britain.
"The recovery on depressed Australian volumes that stemmed from weather events (flooding) in 2011 and prolonged labor strikes in 2012 is contributing to the oversupply and keeping a lid on prices," Raymond James analysts led by James Rollyson wrote in an Aug. 14 report. "We fear stronger supply levels for metallurgical coal amid a somewhat soft global steel market will lead to continued near-term pricing weakness before we see a true recovery," they said.
Raymond James is forecasting metallurgical coal prices of $150 in the fourth quarter and $160 for 2014.
"We don't think metallurgical prices that we expect in 2013 and 2014 are sustainable," Zubets-Anderson said. "Once prices improve in 2015, metrics should bounce back."
_ With assistance from Sonja Elmquist in New York.