Earlier this week, Walter Energy Inc. (WLT) provided its preliminary operating results for Q2'13 and also made amendments to its $2.725 billion credit agreement which was initially started in April 2011. I believe the credit amendment is likely to augur well for the company and positively impact the stock price.
In an attempt to improve financial flexibility in the tough business improvement, WLT secured amendments to its $2.725 billion credit agreement. The amendment suspends the senior secured leverage ratio covenant till June 2014 and the interest coverage ratio covenant till March 2015. It further provides the company with flexibility to raise additional unsecured debt.
At the same time, the amendment also adds a minimum liquidity requirement of $225 million at the end of every quarter and maximum capital spending limits of $175 million and $200 million for 2013 and 2014, respectively. Along with a one-time consent fee payment of approximately $17 million, interest rates for WLT are also likely to increase by 1% due to the credit agreement.
The minimum liquidity condition of $225 million should not be a concern for the company, as it has healthy liquidity reserves of $536 million and there are no significant debt maturities until 2015. Last month, WLT also withdrew its plan to refinance $1.55 billion worth of debt. I believe the credit amendment provides the company with time and flexibility to survive the current downturn in the coal markets.
Preliminary Operating Results
WLT also recently declared its preliminary operating results for Q2'13. Met coal production is expected to be 2.9 million tons in Q2'13, representing an increase of 7% QoQ. Management expects met coal sales to total 2.4 million tons in Q2'13, down from 2.7 million tons in the first quarter due to "late arrival of vessels."
Moreover, management expects production costs to decrease by more than 10% in 2Q'13, as compared to Q1'13. WLT's CEO, Walt Scheller, said, "We significantly reduced costs in the second quarter led by strong performance from our Alabama premium hard coking coal mines."
WLT is scheduled to announce 2Q'13 results on July 31, 2013. Analysts are expecting a loss per share of $0.52 and quarterly revenues of $509.5 million for 2Q'13. An important takeaway from the upcoming earnings release will be the company's decision regarding production cuts. The timing and magnitude of the coal production cut will decide the time span and level of recovery in the met coal market.
The company also announced that, to improve its financial flexibility, its board of directors has approved a huge dividend cut of 92%. Regular quarterly dividends have been reduced to $0.01 per share from $0.125 per share. The dividend cut is likely to result in approximately $29 million of cash savings annually. With a new annualized dividend rate of $0.04, WLT now offers a forward dividend yield of 0.35% only. The next dividend is payable on Sept. 6, 2013.
I believe the amendment in the credit agreement is likely to bode well for the company and provides WLT with financial flexibility to survive the ongoing downturn in the industry. Other important near term stock price catalysts for WLT are Q2'13 earnings release, guidance update for upcoming quarters, and 4Q'13 met coal benchmark price settlement.