Bankers see hope for coal despite funding woes

OREANDA-NEWS. June 18, 2015. Weak fundamentals and even weaker balance sheets are pressuring the US coal industry but potential lenders are eyeing producers' restructuring strategies for opportunities, panelists said at a Barclays conference last week.

"The picture is bleak but coal is not going away," Barclays Capital managing director and high yield analyst Matt Vittorioso saidin Colorado Springs, Colorado.

The Energy Information Administration expects coal to account for 39pc of US electricity generation in 2020 and 37pc in 2030, compared with 39pc in 2014, without accounting for the Environmental Protection Agency's Clean Power Plan for cutting CO2 emissions. The CO2 plan in its currently proposed form will force coal's share down to 31pc in 2020 and 25pc in 2030.

Declines in coal production likely will be proportionately larger than decreases in coal generation because the oldest part of the fleet is retiring and the remaining plants are more efficient, said George Mack, a managing director at Barclays' global restructuring and finance group. But "thermal coal is not going away," he added. The analysts were speaking on 12 June at a session of the Barclays High Yield Bond & Syndicated Loan conference.

"Capital markets for the past two years have been friendly [to coal producers] but the liquidity trend is coming to an end," Vittorioso said.

Several US coal producers in recent months announced layoffs, cut output and some are seeking Chapter 11 bankruptcy protection. Stock market valuations of major publicly traded companies have dropped, so most turn to existing or new lenders to cover liquidity gaps. And lenders have to consider a host of legal issues affecting producers, ranging from retirement benefits to reclamation obligations to collective bargaining.

A bankruptcy judge may approve the use of sections 1113 and 1114 of the Bankruptcy Code to override terms of union agreements for restructuring a coal company but "I do not know how they will deal with strikes," law firm Weil Gotschal partner Joe Smolinsky said.

Certain obligations, such as black lung benefit policies, will have priority status over other claims under federal law, Smolinsky said. But lenders' "general view is that some Coal Act [retiree health] obligations can be discharged upon sale," he added.

The choice of US Bankruptcy Court venues for reorganizing a company is an important consideration, according to Smolinsky. "West Virginia and Kentucky are not good venues for bankruptcies" while Virginia districts are emerging as "the filing place of choice," he said.

Several producers made public their concerns about inability to meet self-bonding requirements, which allow coal companies to leave a portion of mine remediation obligations uninsured if they meet balance sheet performance tests.

Market participants are concerned about potential implications of self-bonding rules on producers' already weak cash holdings. But some companies appear to have found a loophole in self-bonding requirements by using subsidiaries' financial positions, which do not reflect liabilities on the parent company's level, Smolinsky said. "So the federal government is getting involved to see if they are breaking the spirit of the law," he said.