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China Coal Energy

World’s biggest privately owned coal company Peabody files for bankruptcy as slowdown in China and falling prices bite

PUBLISHED : Thursday, 14 April, 2016, 3:22am
UPDATED : Thursday, 14 April, 2016, 3:22am

Leading global coal producer Peabody Energy Corp filed for US bankruptcy protection on Wednesday after a sharp drop in coal prices left it unable to service debt of US$10.1 billion, much of it incurred for an expansion into Australia.

The Chapter 11 bankruptcy filing from Peabody, the world’s biggest private-sector coal producer, ranks among the largest in the commodities sector since energy and metal prices began to fall in mid-2014 as once fast-growing markets including China and Brazil started to slow.

Unlike most large corporate bankruptcies, Peabody’s filing did not sketch out a plan for cutting debt, although it said it expected its mines to continue to operate as usual.

Peabody estimated its assets at $11.0 billion and liabilities at $10.1 billion as of the end of 2015, according to court documents.

The St. Louis-based company said its planned sale of mines in New Mexico and Colorado had fallen through and that its Australian operations were excluded from the bankruptcy filing.

Peabody has agreed to $800 million in debtor-in-possession financing from both secured and unsecured creditors, subject to court approval, including a $500 million term loan, a $200 million bonding accommodation facility for cleanup costs and a letter of credit worth $100 million, it said.

Large coal companies like Peabody have been allowed to leave a share of future mine cleanup without collateral through a programme called “self bonding” that has come under federal scrutiny following financial distress in the coal sector.

Shares of Peabody, which closed at $2.07 on Tuesday, were halted on Wednesday.

“This process enables us to strengthen liquidity and reduce debt, build upon the significant operational achievements we’ve made in recent years and lay the foundation for long-term stability and success in the future,” Peabody Chief Executive Officer Glenn Kellow said in a statement.

Debt troubles for Peabody date to its $5.1 billion leveraged buyout of Macarthur Coal in 2011, just when prices peaked for the metallurgical coal that the Australian company supplies to Asian steel mills.

As demand for metallurgical coal fell, particularly in China, Peabody’s financial woes intensified. The company took a $700 million writedown on its Australian metallurgical coal assets last year.

At home, the US shale boom of the past few years made natural gas competitive with thermal coal, and the Obama administration’s environmental regulations raised operational costs.

“2016 will probably go down as the worst year in history for US coal,” JPMorgan said in a research note on Tuesday. US production declined 31 per cent in the first quarter from a year earlier, although stockpiles still remain high, the note said.

Producers accounting for about 45 per cent of US coal output have filed for bankruptcy in the industry downturn, based on the most current government figures published in 2014.

In November, Peabody agreed to provide investors with more robust disclosures about how its business could be hurt if global governments move to tackle climate change.

It struck the agreement after New York state’s attorney general found it had not informed investors that its internal studies showed revenue could tumble if coal were targeted in a crackdown on carbon emissions.

While coal use has stalled globally, largely because of China’s economic slowdown and efforts to protect domestic miners and rein in rampant pollution, most analysts expect consumption to remain stable or rise in the future.

Some 500 coal-fired power stations are under construction, primarily in the Asia-Pacific region, where consumption is still growing in emerging markets as well as developed economies including Japan and South Korea.