Court to OK Peabody plan wiping out more than $5B in debt despite resistance

With a bankruptcy court judge signaling support for its restructuring, Peabody Energy Corp. is set to emerge from its yearlong bankruptcy process in April despite objections to the plan of reorganization.

"In the past year, Peabody has reduced pre-filing debt levels by more than $5 billion, lowered fixed charges related to hedging and take-or-pay commitments, decreased royalty payments and sold non-core assets," the company said in a March 16 news release. The release noted that a judge with the U.S. Bankruptcy Court for the Eastern District of Missouri ruled he planned to confirm the company's reorganization plan. "The company has done so while achieving record results in safety and costs, continuing to serve global coal customers, minimizing impacts upon employees and communities, strengthening the Australian platform, restoring the land and securing bonding assurances, obtaining exit financing on attractive terms and further aligning employees in a shared future."

Confirmation, Peabody said, hinges on finalizing language related to a settlement with the U.S. Department of Justice. The company plans to reorganize through a $1.5 billion stock sale made up of a $750 million rights offering for bondholders and a $750 million private placement of preferred equity offered to institutional investors.

The market for coal has changed dramatically since Peabody filed for bankruptcy court protection a year ago. The company will be the last of the large coal producers to emerge from bankruptcy after a wave of similar bankruptcies driven by large debt and weak coal markets.

Investors have taken notice of the sea change and at the same time equity investment interest has piqued, giving coal new access to capital markets.

Peabody said there were "overwhelming consensus positions" for its emergence upon restructuring, despite objections from some parties including asset managers, the Sierra Club and former executives of the company.

The opposition presented a range of criticisms of the plan of reorganization, with some saying Peabody's evaluation of future coal markets was too pessimistic and others calling it as "overly rosy." Peabody said alternatives to its plan were unconfirmable.

The Sierra Club called Peabody's plan "deeply misguided" shortly after the hearing where the judge signaled his support. The environmental group, which hired a consultant to analyze the plan as much as possible without access to Peabody's financial information, said Peabody's plan is "based on its flawed assumption of a miraculous recovery of the coal market" even as the number coal of plants is shrinking.

Peter Morgan, the staff attorney with Sierra Club, told S&P Global Market Intelligence ahead of the hearing he would not be surprised if the judge sided with Peabody. He worried the judge was taking Peabody's word on the feasibility of the company's intentions to both reduce costs and increase market share.

"Unfortunately, we're going to have to wait and see whether Peabody's gamble will pay off for them," Morgan said. "We don't think it will. … At least we'll know we took our best shot at trying to raise these concerns. Maybe next time the bankruptcy court will be more inclined to hear us out."

Peabody's equity, currently traded as BTUUQ, will be extinguished once the company emerges from the bankruptcy process and the company expects to trade new shares on the New York Stock Exchange.