OREANDA-NEWS. Fitch Ratings has downgraded Peabody Energy Corporation's (Peabody, NYSE: BTU) long-term Issuer Default Rating (IDR) to 'C' from 'CC'. Approximately $8.4 billion in face amount of obligations is affected by today's rating actions. A complete list of rating actions follows at the end of this release.

The company has been in discussions with creditors on an out of court restructuring, but Fitch views bankruptcy as a highly likely risk.

The downgrade of the IDR reflects Fitch's view that default of some kind is highly likely. Peabody is in default of its credit agreement given the opinion on its financial concern has a 'going concern uncertainty' paragraph and is unlikely to comply with its financial covenants as if March 31, 2016. Peabody has elected to exercise its 30 day grace period with respect to interest payments due March 15, 2016 on the 6.5% senior unsecured notes due 2020 and the 10% second lien notes due 2022. All of the senior secured and senior unsecured debt, $5.9 billion in aggregate, is now listed as due.

Distress results from increased demands on liquidity, continued competition in domestic markets from cheap natural gas and bankrupt coal producers, expectation of a delayed recovery in the seaborne metallurgical coal market from very low levels, and prospects for further weakness in the Asia Pacific steam coal markets.

KEY RATING DRIVERS

Liquidity: Fitch believes that the company has sufficient cash to support operations for roughly 18 months absent asset sales. On Feb. 9, 2016, Peabody drew the remaining availability under its $1.65 billion revolving credit facility resulting in cash balances of $778.5 million. As of March 11, 2016, Peabody's liquidity was $0.9 billion consisting primarily of cash and cash equivalents.

Fitch expects cash burn in 2016 and 2017 aggregating $787 million using 2016 guidance on volumes, costs and capital expenditures.

Asset Sales: The company has agreements to sell assets in the first quarter of 2016 for net proceeds aggregating $415 million. This figure includes the sale of its New Mexico and Colorado assets to Bowie Resources that was expected to close in the first quarter. Peabody has not accounted for this asset as a discontinued item given the uncertainty associated with completing the transaction.

Recovery Analysis: Fitch's going concern EBITDA is $650 million to reflect long term lower volumes in the U.S., reduced overhead and break-even conditions in Australia. Fitch's multiple assumption is 4.5x given how much of the industry is distressed and the need for asset valuations to incorporate assumption of asset retirement obligations. Fitch notes that using a 4x multiple results in an enterprise value that is close to a liquidation value. Fitch has assumed a 5% concession allowance to be spread among the second lien, unsecured and junior subordinated notes.

Capital Requirements to decline: The company's fifth annual and final $250 million federal coal lease payment is in 2016 its fourth annual and final Patriot Coal related VEBA payment in the amount of $70 million is in 2017. The company and the United Mine Workers of America agreed to a revision of this obligation, which if approved by the court, reduces Peabody's obligations by $70 million in 2017.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Peabody include:

--2016 Benchmark hard coking coal and Newcastle prices of $85/t and, $50/t respectively;
--Production, dividends and capital spending at guidance;
--Asset sales that have been announced and not delayed are factored into the projections.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Failure to pay debt service within grace periods and or bankruptcy filing would result in a downgrade of the IDR to 'D';
--Distressed Debt Exchange would result in a downgrade of the IDR to 'RD'.

Positive: Future developments that may, individually or collectively, lead to negative rating action include:

--Expectation of positive free cash flow generation.
--Liquidity enhancing activity resulting in proceeds of $500 million in aggregate.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions:

Peabody Energy Corporation
--Long-term IDR downgraded to 'C' from 'CC';
--Senior secured revolving credit and terms loan downgraded to 'CCC-/RR2' from 'CCC/RR2';
--Senior second lien secured notes affirmed at 'C/RR6';
--Senior unsecured notes affirmed at 'C/RR6';
--Convertible junior subordinated debentures affirmed at 'C/RR6'.