Alpha Natural Resources (ANR) issued $700 million in senior notes in 2011. The notes have a 6.25% yield at par, but given the decline in price, the notes now have a yield on cost of 7.5%.
However, given that these are bonds, yield to maturity is a more accurate measure of return since companies are required to eventually call bonds, unlike preferreds, where there is no obligation.
The yield to maturity is around 9.4%. I think this is attractive given the performance of the underlying company.
Over the last three years, Alpha Natural Resources has maintained positive free cash flow. In FY 2012, Alpha Natural Resources had a FCF of $116 million. It's important to note that even though ANR's debt load has increased, the company has been able to maintain positive FCF on higher interest expenses.
Interest expense increased from $141 million in 2011 to $198 million in 2012. I believe the market might be somewhat concerned about the additional debt load and could explain the fall in the bond prices. I don't believe this to be an issue though.
Now it is no secret coal miners have been hurting for a while. This is due to a mix of regulation and low natural gas prices. Coal is not as attractive of an energy source as it used to be for these reasons. BMO Capital Markets downgraded ANR recently for the same concerns. BMO projects a decline in coal production for ANR by 10Mtpa for its Appalachian region. While coal prices have fallen, it seems that further reduction in production can only help. Investment banking firm, Macquarie, states that prices will stay below $150 a ton for metallurgical coal. However, they believe prices will rebound to $200 in 2015.
ANR has been able to keep its head above water even with low coal prices. I believe that the company could very well continue to yield positive FCF and eventually see coal prices rise in a couple more years. This would further solidify the company's financial strength and given the way the bonds are priced, investors could see price appreciation if the markets realize the company is becoming more stable.
Keep in mind this is a senior note so this is higher up in the food chain as far as creditors go. There is also an early call date attached to this as well. The bonds can be called on 06/2016. If this were to happen this would be an ideal scenario since investors would not have to wait until maturity, which is 06/2021.
However, even if the bonds are not called early this still is a good because investors can continue to realize a strong yield with decent upside in price. I think the overall reason for the collapse in prices is more so related to the macro environment than the company risks.
ANR was able to lock in a lower yield in 2011, when they issued these bonds. However, after the Fed mentioned tapering to be a possibility, the prices for ANR bonds began to tank as investors wanted a higher yield.
I think the market has pretty much priced in a rising rate environment. This is a great opportunity because if ANR is able to refinance its debt, investors will realize a great return when this bond is called.
The CUSIP for this bond is 02076XAC6. Please check with your brokers if this is your first time purchasing bonds.