When rumors of bankruptcy are hanging over the heads of a company's investors, the price action in that company's stock can be viewed as a canary in the coal mine. After yet another large decline in its stock on Tuesday, down 14.03%, the canary in Patriot Coal's (PCX) mine looks very sick. The stock is now trading at $1.90 per share, down 64.68% in the last month alone. It's now certainly giving James River Coal Company (JRCC) competition on the bottom rung of the coal industry.
In my May 24th article, "Before Bottom Fishing For Patriot Coal, Consider This," I presented the idea, for those investors who felt compelled to invest in Patriot Coal, of considering its 4/30/2018 maturing, 8.25% coupon bond, senior unsecured note, CUSIP 70336TAC8, yielding over 25%, rather than buying the stock. At the time, the note was asking 49 cents on the dollar with Moody's and S&P projecting a recovery on the note of somewhere between 40 and 70 cents on the dollar (in the event of default). The note is still hovering in the upper 40s, now asking 47.95 cents on the dollar and yielding 25.962%.
Besides the bond market's sub-50 cents on the dollar pricing of its senior unsecured note, the options market is also sending a signal of severe risks. The options market is currently offering premiums on various $1 puts that the Patriot Coal bulls are surely salivating over as they seem too good to be true.
The $1 puts expiring just a week-and-a-half from now, June 16, are bidding 5 cents. Writing cash secured puts on this strike will return 5% in less than two weeks.
The July 21, 2012 $1 puts are bidding 15 cents. If you think the company can survive through July's expiration, the market is offering you the chance at a 15% return should you sell those puts, or a cost basis of 85 cents (ex-commissions) in the stock, 55.26% below its recent close.
Are you interested in a 25% return in less than four months? If so, the $1 September 22 puts may be of interest. If you sell these puts cash secured, at the current bid 25 cents, you will either make 25% or end up long the stock with a cost basis of 75 cents (ex-commissions), 60.53% below its recent close.
Over the past few months, I've read quite a few articles about coal companies and the prospects for their stocks. It is clear from the multitude of comments that seem to accompany any negative sentiment in an article on coal companies that passions are running high among many investors in coal. One article I would recommend to anyone considering an investment in Patriot Coal is "Patriot Coal: Standing At The Precipice." It is a very informative article and the myriad of comments that follow should also provide plenty of food for thought.
I continue to want to stay away from anything that has to do with Patriot Coal (stock, bond, options). For investors looking to play coal more conservatively than with Patriot Coal's or James River Coal Company's stocks or bonds, Peabody Energy's (NYSE:BTU), Alpha Natural Resources' (NYSE:ANR), and CONSOL Energy's (NYSE:CNX) senior unsecured notes might be of interest.
Peabody Energy's 9/15/2020 maturing, 6.50% coupon, senior unsecured note, CUSIP 704549AH7 is currently yielding 6.403%; Alpha Natural Resources' 6/1/2021 maturing, 6.25% coupon, senior unsecured note, CUSIP 02076XAC6 is currently yielding 8.161%; and CONSOL Energy's 3/1/2021 maturing, 6.375% coupon, senior unsecured note, CUSIP 20854PAH2 is yielding 7.645%.
For more information on any of the notes mentioned in this article, including additional call or put features, please contact your broker or read the indenture. Also, please do your own due diligence on the financial profiles of the companies mentioned in this article. Only you can determine if taking the counterparty risk of purchasing individual bonds is suitable for you.
Disclosure: I am long BTU.
Additional disclosure: I am long CUSIPs 704549AH7, 02076XAC6, and 20854PAH2.