CreditRiskMonitor® recently published a High Risk Report on distressed coal miner Peabody Energy Corporation. If you work with this company in any capacity, this detailed report will provide a holistic financial evaluation. Before diving in, we are offering five quick and important facts that you need to know about Peabody Energy right now to make a more solid business evaluation – or, more advisable, even an alteration of credit extension or a pivot to a peer.
1. A High Risk of Bankruptcy
Peabody Energy has a FRISK® score of "2", which is the second-worst score on the "1" (highest risk)-to-"10" (lowest risk) scale. It indicates a 4-10x greater risk of bankruptcy than the average public company. What you need to watch out for: Peabody Energy continues to pay its bills in a timely manner, which effectively cloaks the true underlying risk that counterparties face today.
Essentially, knowing that risk professionals monitor payment history, public companies with access to capital markets and bank lines of credit will do everything possible to pay promptly and maintain their trade credit lines. The FRISK® score avoids the cloaking pitfall by instead examining financial statement ratios, stock market performance, credit agency ratings, and subscriber crowdsourcing research patterns to identify bankruptcy risk with 96% accuracy.
So while you may be receiving prompt payments from Peabody Energy as your customer, mounting distress and debt can only be held off for so long. Before the company’s next invoice is due, a Chapter 11 bankruptcy filing could reach the court, totally blindsiding unsecured creditors.
2. We've Been Here Before
If Peabody Energy declares bankruptcy, it would not be a Chapter 11, but essentially a Chapter 22. The coal miner went through a restructuring five years ago in 2016 and subsequently emerged one year later, a long tie-up period that creditors generally try to avoid.
In 2016, Peabody Energy was struggling under the weight of debt it took on to expand in metallurgical coal with the acquisition of Macarthur Coal and demand later fell. The idea was to balance out its thermal coal operations. However, when both coal markets struggled, Peabody Energy sought out court protections. This time, there isn’t a large acquisition debt load to justify the distressed balance sheet, simply a lack of demand and systematic decline in the domestic coal market.
3. A Still High Debt Load
Today, Peabody Energy's total liabilities are three times larger than its market capitalization, which reflects high financial leverage. While absolute debt levels have fallen in each of the last two quarters, a $1.4 billion impairment charge in 2020 caused deterioration in its debt-to-equity ratio to a worrying level of 1.7x. Meanwhile, Q1 2021 total debt-to-EBITDA and TTM EBITDA are 9.1x and 5.5x, respectively, which are appreciably worse than coal industry peers. Interest coverage in Q1 2021 was only 0.76x. Anything below 2x is worth reviewing, but below 1x is a real sign of near-term trouble that has to be seriously considered.
In other words, despite the previous recapitalization in 2016, Peabody remains a highly indebted company. The leopard has not changed its spots.
4. The Coal Industry Remains Troubled
The coal industry was hard hit in 2020 as economies around the world shut down in an attempt to slow the spread of COVID-19. Based on its Q4 2020 conference call, Peabody Energy was forced to idle nine mines last year to deal with the global recession brought about by government coronavirus actions. Although economies are reopening, new variants of COVID-19 continue to hamper economic activity in both developed and developing nations. The ongoing preference shift toward clean energy alternatives with large institutional investors, such as BlackRock, making climate change a defining factor in proxy voting and investment decisions puts coal in the crosshairs. The EIA recently indicated a short-term improvement in 2021 but that would subside thereafter: “...we expect higher natural gas prices, we forecast coal’s generation share to rise from 20% in 2020 to 24% this year but to fall to 22% next year.” So even with a reprieve, this highly leveraged coal miner will continue to face difficult industry conditions and potential difficulty in obtaining ongoing operational funding.
5. Desperately Trying to Right the Ship
Peabody Energy, wanting to avoid the same fate of the last industry downturn, has been working with lenders. Such efforts have included exchanging 6% senior secured notes due in 2022 with two bond offerings, including 10% senior secured notes and 8.5% senior secured notes both due in January 2024. The company has also filed to sell up to 12.5 million new shares and offered to tender $18.28 million of its 8.5% senior secured notes. Peabody Energy is actively managing its debt structure amid high leverage and a still weak operating environment, which should be done well in advance of future industry weakness. While these actions reflect an acknowledgment of distress by the company, payments to vendors continue to be timely and could very well be the next shoe to drop. Don’t wait for payments to mirror the financial distress indicated through so many other channels before taking defensive actions.
Peabody Energy Corporation has quickly found itself in trouble after emerging from bankruptcy less than five years ago, which is revealed by its worrying FRISK® score of "2."
Do not let the coal miner's prompt payment behavior cover up the underlying risks associated with the company. Contact us today to see how we can help you identify these distressed operators across your entire portfolio.