As recently as April 2011, Peabody Energy (BTUUQ) was far and away the most valuable U.S. coal producer with a market capitalization of $19.68 billion. The current market value of Peabody Energy stock is $37 million and it is heading for zero when equity is cancelled post reorganization.
On a more personal level, losers include a frugal retired priest who may need to go back to work to pay for his living expenses when Peabody Energy stock is cancelled as expected. An elderly gentleman from the St. Louis area will lose hundreds of thousands of dollars on Peabody Energy stock. Others from the U.S. and Australia I have bonded with over the Peabody Energy nightmare also took a bath on Peabody stock (and bonds) and may never fully recover. Investors may never invest in stocks or corporate bonds again once they see the results of the Peabody Energy reorganization.
Debtholders are also taking a haircut if the current reorganization is confirmed by Judge Schermer on March 16. Retail noteholders would end up with a crewcut while co-proponents may get a much smaller trim. The estimated recovery to retail unsecured debtholders is 21.1% on debt that traded at .79 back in December 2016. Even the co-proponents who wrote the reorganization plan for their own benefit could be capped at 50% recovery according to page 22 of the disclosure statement.
As you can see the co-proponents collectively control the bulk of the Peabody debt:
- Elliott/Aurelius/Discovery holdings
- Pointstate/Contrarian/Panning holdings
- South Dakota Investment Council holdings
I'm sure the co-proponents will get much more when you factor in an aggregate profit of at least $460 million, ignoring the Makewhole Amount, which will almost certainly become payable within days of the Debtors' emergence. When the Makewhole Amount is included, the aggregate amount of profit that participating parties will realize at the "agreed" Plan Equity Value increases to over $640 million. When calculated at fair market value, rather than the Plan Proponents' own "agreed" (and self-serving) Plan Equity Value, the aggregate amount of profit that participating parties will realize balloons to more than $1.4 billion, meaning that participating parties will receive Preferred Equity worth more than $2.15 billion in return for investing only $750 million in the Reorganized Debtors." This assumes their plan is confirmed which is questionable since there is no case law I can find covering such differential treatment of identical securities.
Standing in line against the plan is everyone from the U.S. Government to retail noteholders, the Ad Hoc Committee of Non-Consenting Creditors, former executives, and more. All in all you have the biggest circus since Ringling Bros. and Barnum & Bailey Circus was at its peak. The losers are not just equity but tons of non-bondholding creditors which have been wiped out, contracts voided, pensions voided, etc.
The 2018 and 2020 Peabody Energy notes which traded at .79 in December 2016 could potentially have a recovery of .211 for retail noteholders and .50 for co-proponents. I believe current cash and EBIDA support the full debt load according to former Peabody Energy executive Fred Palmer's reinstate document that thus far neither the court nor Peabody Energy has expressed interest in. If the reinstatement were to take place, I believe Peabody Energy stock would not need to be cancelled and the Peabody Energy notes referenced above could be trading close to par. Back interest and forward interest would be the icing on the cake so to speak for all debtholders. Value recovery would be far more profitable for the co-proponents and all other Peabody Energy investors.
There's a good possibility the biggest winners by far are senior management. This is a very sad situation. A recent article from Reuters states that initial stock award to CEO Glenn Kellow alone could be worth as much as $43.5 million. Peabody predicts the management incentive plan could be worth $310 million based on a lowball $3.1 billion market capitalization. Of course with a market capitalization of $6 to $8 billion if the shares were purposely valued at substantially lower levels to reap substantially higher rewards, there would be much more for management to gain.
Lawyers are also big winners with hundreds of millions of dollars in legal fees on the Peabody Energy bankruptcy, reorganization, and litigation. Other service providers as well as underwriters of Peabody debt from the reorganization benefit as well as aspirin companies and bars would benefit to a smaller extent from all the Peabody Energy related stress. Not even the Board members win. They owned a lot of stock which probably doesn't get replaced. Hopefully co-proponents of reorganization plans in the future will wonder in the future if bankruptcy is truly the best alternative.
Here is another thing that concerns me about Peabody Energy. They just filed unaudited financials to the SEC to Dec. 31, 2016. On Dec. 31, 2015, Arch Coal had debt of 5140, negative equity of 1244 and implied asset (book) value of 3821. After emerging from bankruptcy on Dec. 31, 2016, Arch has net assets of 1109, debt of 363 and equity of 746. The market cap (@65.50) for ARCH was $1.82BB or 1.65x the book value. Now let's do Peabody on a comparable basis.
On Dec. 31, 2015, BTU has debt of 5940, positive equity of 917 and implied asset book value of 6857. Based on the filing just released, as at Dec. 31, 2016, Peabody Energy has implied assets of 11.4 (3BB of 1&2L, 8.4 BB of compromised debt and .3 of still positive shareholders equity.
As per their approved plan, Peabody Energy management proposes to write these assets of 11,400 down to 5114 (1&2L debt 1973, plus equity of 3138. This would be a 50% writedown on what objective basis? No formal valuation, no audit?
March 16 is the confirmation hearing day of the reorganization plan. To the best of my knowledge, I believe there still may be time for all parties to go Fred Palmer's reinstate route which would likely result in the best recovery to all parties. If the judge confirms the plan, I believe this will mark the first time in history the U.S. court would approve a discriminatory reorganization plan, whereby holders of identical securities get different recoveries. This either will be a day of justice in the court or a sad precedent for the future direction of the U.S. court system.
I own $130,000 face value of Peabody Energy subordinated bonds maturing in 2018 and 2020 and $47,000 face value of Peabody Energy convertible bonds maturing in 2066.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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