Peabody punished after earnings warning; California Resources slide continues; Puerto Rico payments help bonds

By Paul Deckelman

New York, July 1 – The month of July opened on Wednesday with considerable news-driven activity among some distressed-debt names, even as the market approached the impending July 4th holiday, usually a time of lessened activity.

Peabody Energy Corp.’s bonds, convertible debt and the latter’s underlying shares were all heading downwards after the big coal producer revised its previously issued earnings guidance downward, blaming the anticipated fall-off on weather-related shipment issues in the Powder River Basin of Wyoming and lower seaborne coal pricing.

Meanwhile, the badly battered bonds of Peabody’s coal industry sector peers such as Arch Coal, Inc. and Alpha Natural Resources, Inc. continued to languish. The latter’s creditors have reportedly hired legal and financial advisors in preparation for talks with the company ahead of an Aug. 1 repayment deadline on some of its debt.

Also in the energy world, California Resources Corp.’s bonds continued to slide in the face of falling oil prices.

But Puerto Rico’s general obligations bonds were better – and saw some trading activity from distressed-debt-focused accounts as well as the usual municipals investor base – on the news that the financially challenged United States island commonwealth had made scheduled July 1 payments totaling some $1.9 billion on some of its G.O. bonds, a bank loan and on Puerto Rico Electric Power Authority debt, putting to rest – at least for now – investor fears of a possible default on those obligations.

The power authority’s creditors, meanwhile, agreed to extend a forbearance agreement set to expire on June 30 until mid-September.

Peabody pummeled on outlook

In the day’s biggest black hole, Peabody Energy’s bonds and shares were taking it on the chin on Wednesday as investors reacted to the St. Louis-based coal operator’s release late Tuesday of revised earnings guidance – with Peabody warning that 2015 second quarter adjusted EBITDA, as well as adjusted earnings per share, are now expected to be below their original targeted ranges due to weather-related shipment issues in the Southern Powder River Basin of Wyoming and lower seaborne coal pricing.

A trader said, for instance, that Peabody’s unsecured 6½% notes due 2020 and its 6¼% notes due 2021 were both moving around in a range of 30 to 33 bid.

He said the 6½s were last trading around 30½, on volume of over $10 million, “down a chunk – like 5 points from [Tuesday].” He also saw the 6¼s around 30, down 4 points on the day, with around $5 million changing hands.

He also saw Peabody’s 7 7/8% notes due 2026 trading at 31 bid, calling that down 1 or 2 points, with about $4 million or $5 million moving around

“As one goes, they all go,” he declared.

Another trader said that Peabody’s 6% notes due 2018, which “had gotten up close to 50” on Tuesday, “took it on the chin” on Wednesday, falling into a 43 to 45 range.

He saw the longer-dated notes such as the 2020s and 2021s trading around 30, “so those are down a couple of points as well.”

“BTU got hammered,” he concluded.

The first trader said that “the second-liens have held up – but their unsecured bonds are the ones that have gotten beat up.”

Demonstrating his point, he said the company’s 10% second-lien notes due 2022 were trading most of the day in a 60-62 context, which he said was “pretty much where they have been in the last couple of days.”

A second trader, though saw the bonds finishing at around 59½ bid, 61 offered, which he said was off “roughly 2 points or so” from the 62 level at which the bonds had gone home on Tuesday.

At another shop, those bonds were seen to have dipped to around 59-60.

A market source at another desk pegged the notes at 60½ bid, down 1½ points on the day, with more than $28 million traded, putting Peabody high up on the day’s Most Actives list.

The carnage in the unsecured debt extended to the company’s equities as well, with its New York Stock Exchange-traded shares plummeting by 41 cents, or 18.72%, to end at $1.78. Volume of over 72 million shares was around 4.5 times the norm.

When Peabody announced its results in late April for the 2015 first quarter ended March 31, it projected that adjusted EBITDA for the just-ended second quarter would likely come in somewhere between $135 million and $175 million, while its adjusted diluted loss per share would be in a range of 49 cents to 59 cents.

Peabody did not issue new anticipated adjusted EBITDA and per-share guidance on Wednesday, only saying that the results to be reported would be weaker than those earlier predictions.

In the first quarter, adjusted EBITDA was $165.6 million, with a diluted loss per share of 62 cents, including 23 cents per share related to the company’s refinancing of its then-outstanding 7 3/8% notes due 2016 using the proceeds from the March senior secured bond deal.

Peabody said that when it reports its second-quarter results, which are scheduled to be released on July 28, it expects its results to reflect a timing-related impact of about $40 million as a result of a series of substantial rain and flash flooding events in the southern part of the Powder River Basin, primarily in June, that reduced production by between 5 and 5.5 million tons.

Peabody said that it has largely resumed normal production levels and is scheduling to make up the deferred shipments in the current third quarter and in the fourth quarter.

The company said that it was also impacted by some $20 million from the effects of lower pricing on Australian metallurgical coal, with around half of that related to spot coal sales during the quarter and the other half related to reduced coal inventory valuation due to benchmark third-quarter settlements. Spot metallurgical coal prices declined 15% percent during the quarter before increasing in recent weeks, Peabody said.

Peabody peers under pressure

Peabody’s sector peers also remained under pressure Wednesday. For instance, a trader said that Arch Coal’s bonds “are all still in the teens to low 20s,” with its 7¼% notes due 2021 in a 13 to 15 context, though on “not a lot of volume.”

He said the St. Louis-based coal company’s credit was “drifting lower – but they’ve been there” for a while.

“If it trades at 13, it’s down a point, if it trades at 15, it’s up a point.”

He saw Bristol, Va.-based coal operator Alpha Natural Resources’ 7½% notes due 2020 in the low 20s, although he said “they don’t trade much” and were about at the same levels last week.”

In the convertibles market, meanwhile, both Peabody and ANR were lower on Wednesday – but observers indicated that how much of the price moves were related to Peabody’s second-quarter profit warning was debatable.

“A lot of the damage has been done at this point. An incremental bad earnings report doesn’t mean much; it’s the larger liquidity event that people are looking at,” a New York-based trader said.

Peabody’s 4.75% convertibles were quoted at 14.75 bid, 15 offered at the close. Previously they had been in the 15 to 18 range.

But the drop was not as bad as expected. Earlier in the day, a New York-based trader had predicted the bonds would drop to 10 or lower.

“[Peabody] has a 10% 2022 second lien that came in March and priced at 97.5. It will hopefully pay its first coupon in September. It is trading at 59.5 now,” the trader said.

The trader also noted market speculation – fanned at least in part by a story in Tuesday’s Wall Street Journal – about the possibility of whether Alpha Natural might restructure via Chapter 11 bankruptcy or not.

“ANR has a bond due on Aug. 1, and it is uncertain whether they will restructure or pay for it. That’s more important than a one-pager from The Wall Street Journal. I don’t need much more information than that,” the trader said.

Alpha Natural’s 3.75% convertibles were seen to have traded during Wednesday’s session at 35.5 to 36.

Its 4.875% convertibles traded at 7.

Shares of Alpha Natural fell a couple of cents, or 8%, to 27.8 cents.

The Journal reported on Tuesday that Alpha’s creditor groups have hired financial and legal advisers to prepare for possible restructuring talks ahead of the scheduled August debt payment.

The paper said that the holders of its senior loans, including Citigroup Inc., had retained law firm Davis Polk & Wardwell LLP and financial advisors Ducera Partners LLC, while holders of the company’s secured bonds will be advised by the law firm Kirkland & Ellis LLP.

The story noted the fact that “creditors, as well as companies, tap advisers to explore options to raise capital, sell assets or cut debt through out-of-court restructurings or bankruptcy filings.”

About $109 million of the company’s convertible bonds are coming due on Aug. 1.

The company had $3.1 billion of long-term debt as of March 31, according to regulatory filings.

California Resources retreats

A trader said that oil and natural gas names were being pushed around, with crude prices having fallen more than $2.50 per barrel on the benchmark West Texas Intermediate U.S. crude to below $57 per barrel.

For instance, he said that California Resources’ 6% notes due 2024 were down 1½ points, trading between 84 and 85 bid, on volume of over $35 million.

He said the Los Angeles-based exploration and production company’s 5% notes due 2020 were also 1½ points down, around 87-88, with over $10 million having traded.

Its 5½% notes due 2021 lost 1 point, ending at 85-86, with around $5 million changing hands.

Another trader said the company’s paper “continues to drift lower.”

The company’s bonds – already knocked down from the par level at which all three of those tranches had priced last September by the subsequent slide in crude oil prices – were further hammered last Friday, with all tranches falling into the 80s, after Blue Mountain Capital Management LLC, a brokerage firm, declared in a research note that “we believe that the company’s common stock is worthless and that its bonds are worth around 23 cents on the dollar, taking into account coupons and ultimate recovery upon default.”

It further said that “CRC’s oil fields have high overhead costs; proceeds from the sale of the oil and gas produced there “do not come close to covering its debt.”

There was no immediate response from California Resources.

Puerto Rico payments boost bonds

In the municipals market, Puerto Rico narrowly avoided defaulting on general obligation bonds, short-term debt and a debt service payment for the Puerto Rico Electric Power Authority (PREPA) on Wednesday, market sources said, and in the process, prices on the island United States commonwealth’s general obligation bonds rebounded slightly.

Its 8% bonds of 2035, one of the most actively traded G.O.s over the past week, were at 69.225, with a 12.123% yield to maturity, coming off a high of about 70 during the session. Those 8% 2035s had been seen trading in the mid-60s at the beginning of the week.

Among the other Puerto Rico names actively traded Wednesday, the 5% 2041 G.O.s were seen at 58.525, with a 9.236% yield to maturity, after trading as high as 61 during the day.

As has been the case over a number of sessions recently, the impact of the island paradise’s troubles was not strictly limited to the muni market. A distressed-debt trader said: “Even though I’m not a muni guy – it’s a Puerto Rican day.”

He said that he “and every distressed [debt] guy we spoke to was trading Puerto Rico.”

He estimated that “there must have been a gazillion” of the 8% 2035 G.O.s trading in a 68½ to 69½ context.

Another distressed-debt trader, though, said that from where he sat, Puerto Rico was “not as active as it’s been the past couple of days,” though he allowed that “it’s still trading every day.” He saw the 8% G.O.’s up a little at 68½-69.

He said there were “not a lot” of Puerto Rico Electric Power Authority bonds traded, explaining that “a lot of them are tied up” with the hedge funds who negotiated a forbearance agreement with the power entity.

“If you look, there really not much that traded today – a couple of round lots, that’s it.”

He said there was “some trading” in Cofina – the Spanish acronym for the island government’s Puerto Rico Sales Tax Financing Corp. – “but not a lot. When I look at the total volume, it really wasn’t that much, the only ones trading were a couple of zeros.”

“In terms of P.R., in general,” he further said that “it was really the G.O.’s that continued to trade in Puerto Rico,” the 8s, which are the benchmark, traded a little bit, given that they had an agreement on the PREPA bonds, that helped push them up a little bit more.”

But he cautioned that “I think this is far from over.”

Many market insiders were concerned the commonwealth would be unable to pay $660 million of G.O.s, $415 million for PREPA and a $245 million bank loan, the major components of an estimated total of $1.9 billion of obligations that were due Wednesday and which were paid as scheduled. Their fears were exacerbated by Gov. Alejandro Garcia Padilla’s statement this week that Puerto Rico’s roughly $73 billion in total debt was “not payable,” fueling concerns among investors and bond insurers of a possible Greece-like debt default. On Monday, the governor called for restructuring and reforms, saying Puerto Rico wants to reach a moratorium with its bondholders and stretch out its required payments.

The PREPA payment had been in doubt, but most of the authority’s bonds are wrapped by bond insurance.

Bond insurers, including National Public Finance Guarantee Corp., an indirect subsidiary of MBIA Inc., fronted PREPA $128 million so the utility entity could make its required payment, agreeing to buy that amount of short-term securities maturing on Jan. 1, 2016.

Also, PREPA’s bondholder group agreed to extend its forbearance agreement with the authority until Sept. 15

-Rebecca Melvin and Sheri Kasprzak contributed to this review

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