A rising tide lifted all boats this week except coal credits as the sector was hit fairly hard and continues to trade lower. While there’s no specific news to point to, market participants relay ongoing negative bias toward the sector as well as bearish Street research that’s circulating, most notably a report this week from UBS on bankruptcy risks within the group.
Arch Coal unsecured 7% notes due 2019 were pegged 74/75 this morning, and traded at 74.5, representing a 1.5-point decline today and 4.5-point decline on the week, according to sources and trade reports. ACI shares, meanwhile, traded off roughly 6% this week, to $3.57. Higher up in the capital structure, the second-lien 8% notes due 2019 shed one point this morning, to 98/99, for nearly a four-point decline on the week, sources noted.
Alpha Natural Resources 6% unsecured notes due 2019 traded at 70.5 this morning, versus 73 yesterday, and 77/79 market quotes going out last week, according to sources and trade data. The benchmark 6.25% notes due 2021 slipped nearly seven points this week, to 68/70, an all-time low, while ANR shares traded down approximately 9% this week, to $3.52.
It was worse for Walter Energy, with WLT shares off 13% this week, at $5.03. In bonds, the Walter Energy second-lien 11% notes due 2020 shed 10 points over the week, to 77/79, while unsecured 8.5% notes due 2021 moved lower by eight points, to bracket 55, according to sources.
In assessing bankruptcy risks for these credits, following Patriot Coal and James River Coal‘s Chapter 11 filings in recent years, there is clearly “mounting financial distress” in the sector, according to the UBS report, which was published on May 27. Arch and Alpha Natural have more than three years of cash reserves, but Walter could run out of cash by the end of next year, according to the report.
Due to their high levels of debt, there may be “limited ability to shed other liabilities through a restructuring process,” according to UBS analyst Kuni Chen, who suggested that it could behoove unsecured bondholders to opt for exchange offers or “other concessions” out of bankruptcy.
Recall that S&P downgraded Arch Coal in March to B, from B+, on weaker-than-expected sales and EBITDA targets in 2014 and 2015. That followed a downgrade by Moody’s to B3, from B2, in October for the same reasons.
The Arch Coal corporate rating of B/B3 has stable and negative outlooks, respectively. Unsecured notes are CCC+/Caa1.
Alpha Natural is also B/B3, though with a stable outlook on both sides. Unsecured notes are also CCC+/Caa1.
Walter Energy is rated B-/Caa1, with negative and stable outlooks, respectively. Unsecured notes are CCC/Caa2. – Matt Fuller