Peabody, 6% noteholders try to hammer out terms of exchange offer

By Angela McDaniels

Tacoma, Wash., Jan. 22 – Peabody Energy Corp. and holders of its 6% senior notes due 2018 have been discussing a possible exchange offer for the notes, and the company released a proposed term sheet for the offer in an 8-K filing with the Securities and Exchange Commission on Friday.

The term sheet for the proposal is dated Jan. 8. On Jan. 21, the noteholders responded with their own proposal that tweaks the terms of the company’s proposal.

Each proposed exchange contemplates the exchange of 6% notes for a combination of secured notes issued by a subsidiary that does not guarantee any of Peabody’s existing debt, two series of new secured first-lien notes issued by Peabody and Peabody common stock.

Peabody would contribute some of its mines and related assets to the non-guarantor subsidiary.

No agreement has been reached between the company and the noteholders about the proposals. Peabody expects to continue to have discussions with debtholders.

Peabody said its primary objectives in these discussions are to optimize liquidity, reduce leverage, lower interest expense and extend maturities while taking into account considerations such as timing, tax impact and other factors.

Peabody said it “continues to address the challenges of the current environment with a continued focus on the operational, organizational, portfolio and financial areas of the business” and to evaluate ways to balance its objectives of optimizing liquidity and deleveraging, including potential debt exchanges and buybacks, and is also interested in issuing new debt instruments.

Company proposal

Under the terms of the company’s proposed exchange offer, each $1,000 principal amount of 6% notes would be exchanged for the following:

• $164.60 principal amount of new 6% pari passu secured first-lien notes due 2020 issued by Peabody, subject to a maximum of $250 million new notes;

• $98.761 principal amount of new 6% pari passu NPP secured first-lien notes due 2020 issued by Peabody;

• $217.28 principal amount of new 6% NG secured notes due 2020 issued by the newly formed subsidiary, subject to a maximum of $330 million of new notes; and

• Peabody common stock. If 100% of the 6% notes were exchanged, the noteholders would receive 10% of the outstanding equity of the issuer on a pro forma basis.

No amount would be paid for accrued interest on the existing notes.

If less than all of the 6% notes were exchanged, holders who participate in the exchange offer would be entitled to tender other unsecured notes of the issuer in the exchange offer for residual notes – that is, new pari passu secured first-lien notes – at prices and priority levels to be determined by the issuer.

Under the terms proposed by the company, the exchange offer would be conditioned on the following:

• The receipt of a minimum principal amount of 6% notes;

• Peabody forming a subsidiary organized as a Delaware limited liability company that is designated as an “unrestricted subsidiary” under its first-lien credit agreement and into which substantially all assets associated with its Kayenta, Francisco U/G, Gateway North and Wild Boar mines are contributed;

• The new subsidiary being set up as a bankruptcy-remote entity; and

• The receipt by Peabody of not less than $500 million of net cash proceeds from asset sales.

Noteholder proposal

Under the noteholder proposal, the company would pay 50% of accrued interest on the 6% notes in cash and 50% in the form of additional new NG notes.

Under the company’s proposal, holders would receive $98.761 of NPP notes, which is equal to the maximum principal amount of obligations permitted to be secured by Section 7.01(w) of the company’s first-lien credit agreement, provided that in any event the principal amount of notes issued under clauses (i) and (ii) amount will be at least $400 million.

In contrast, the noteholder proposal calls for $98.76 of new NPP notes per $1,000 principal amount of 6% notes exchanged assuming the basket in Section 7.01(w) is $150 million. If the basket does not permit the issuance of at least $150 million new NPP notes, the principal amount of the new NG notes will be increased dollar for dollar by the shortfall.

In addition, the noteholder proposal adds a cash sweep for the NG notes that would require the issuer to redeem NG notes at par in an amount equal to 10% of free cash flow.

The noteholder proposal also makes some changes to the proposed covenants of the new NG notes.

Peabody is a St. Louis-based coal producer.

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