Peabody raises 10% unsecured debt to post collateral on hedges

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In a release from Peabody (NYSE:BTU) Monday, management disclosed the need to take on additional financing to post collateral on hedges. Peabody (BTU) has entered into an arrangement with Goldman Sachs (NYSE:GS), whereby the the lender will provide a $150m unsecured credit facility at a 10% yield.

The news comes as seaborne thermal coal prices hit record highs. Given the Company's strategy of hedging future production through derivatives and swaps, higher prices have reduced values of derivative contracts and required Peabody (BTU) to post collateral with their clearing broker. Year to date, the company has posted $534m to satisfy margin requirements.

Monday's news comes shortly after management elected to issue a convertible equity note, and following an announced partnership to build out solar assets. Make no mistake, business has never been better for Peabody (BTU) or the thermal coal industry globally. However, missteps by management continue to punish shareholders. Peabody (BTU) shares are down ~10% on the news, despite seaborne coal prices shattering prior record highs.

Comments

[WYCO Researcher]

IMO-the reason for the sharp drop on Monday was the "10%" interest rate number- WHAT? 10%-why so high? If the rate was 6-7% the market may have been disappoint with the need to borrow but would not have plunged.

Why was the rate so high? GS clearly knows something that others don't-and it is not positive.

As I posted on my article I keep trading BTU on these wild swings-but not today.

[SPC2]

@WYCO Researcher My view is that this was basically an emergency line of credit, thus the high rate. BTU will only have to pay 10% if they actually draw on the line.

[WYCO Researcher]

@SPC2 correct, but it is still 10%-VERY HIGH RATE -I would have loaned them at a lower rate based on public info.

[Dividend Investor 101]

Honest question: why would they need to take out a loan for 150 million at 10% interest when they have hundreds of millions of cash as of last quarter? Did they just burn through all the cash they had on their balance sheet or do they think they need to save it for something else for an emergency?

[jzwmnb01]

@Dividend Investor 101 Kinda a good question. I too am curious.

[Midwest Corp Finance Pro]

@Dividend Investor 101 - not a loan yet. Just a revolving facility that according to my read of their 8-K they haven't drawn on. I'm sure they're working to avoid drawing it down. This is expensive insurance in what is a crazy market to be sure. See my comment below on what $420 thermal coal prices actually means.

I'm equally interested in their 8-K that the also noted an agreement with Goldman to sell up to $225M of shares to Goldman at the market in the future. I'm sure shareholders will not be thrilled at more dilution if they execute on that.

[SPC2]

@Midwest Corp Finance Pro Perhaps optimistic, but could just be a sly way of prepping for a run up in share price..? If the stock goes to the moon, they may want to sell a few shares. Or just another source of liquidity if Newcastle goes to $500++. It is company's option on whether to exercise the sale.

[Babanian]

Nobody, repeat…NOBODY saw Newcastle coal at $450/ton. Nobody saw the Ukraine/Russia war coming. You can hardly hedge for every unknown, Act of God scenario. BTU management has done a stellar job bringing the company back from the brink in the era of anti-coal, ESG, Gretta Thunberg, WEF, Biden/Pelosi. If you bought at $3 or $5 or $10 you’re minting gold colored coal. If you’re late to the party, strap in and hold on. And STFU. Coal isn’t going anywhere any time soon.

[samdehne]

BTU hqtrs blundered badly with the way they worded their report
about this silly little blip on the perspective of things.
THEY REALLY NEED A DECENT PROPAGANDA-ADVERTISING
DEPARTMENT TO HELP.
Try this:
"BTU took out access to a tiny loan to help pay for a hedging error;
that will be offset by selling of the other 90% of the majority of the
rest of the coal at massively higher prices." Or something like that.

[Midwest Corp Finance Pro]

@samdehne it wasn't a hedging error - they will make a 40%+ margin on that $84 hedge - which in historical terms is a very strong margin. The market for Newcastle coat has gone parabolic in a way that no one saw or would ever see. Let me try to put this in perspective. In historical terms, you can think of $100 newcastle coal as roughly equivalent to say, $80 crude. Decently high price where you make a lot of money, but not at the upper bound of where prices have gone historically.

So........You can think of $420 per tonne newcastle thermal coal as equivalent to ~$320+ per barrel crude oil pricing. Do you think anyone ever has forecasted, much less planned for the fallout of $320 oil prices? This is what is happening in the seaborne thermal market as we speak. It is insanely high, and one hedge is sucking up half of the liquidity they had at year end so they had to pivot quickly. Sure they wish they had left the production uncovered in hindsight, but it wasn't a hedging error or a bad hedge if you understand the normal bounds of seaborne thermal coal pricing (it has generally bounced between $50 and $100 per tonne the past five years up until the middle of 2021). And the 6 million tons of unhedged production in 22 has the potential to be worth a massive amount to them if they produce the coal and the prices stay up.

[SPC2]

Market is misunderstanding this. Yes, they are underwater on 1.9M of volume that was hedged. But they have around 7M of unhedged volume, or >3x that which is exposed to these very high prices. 7M at $200 (or whatever they end up with, with $450 market price) margin is well over a Billion $ just on that portion of their volume. At $300 margin, that's >$2B, etc. Company has MC of $3.5B and could have FCF of $2B++ if prices hold up anywhere near current coal prices. The loan was basically an urgent matter and really only a temporary bridge to when they deliver the 1.9m volume. Yes, it would be great if they were completely unhedged, but 3/4 unhedged (for seaborne) is pretty damned good exposure to these record prices. BTU should see mid 30's soon, imho.

[Midwest Corp Finance Pro]

@SPC2 finally someone who understands their profile and these prices even a little bit. For those that are trashing management, they a: don't understand what you've highlighted in terms of their price exposure and what it could yield and b: have context for what an $84 hedge is in the seaborne thermal market. Obviously seems stupid now (we're all brilliant in hindsight), but in the context of Newcastle thermal prices which were pretty much range bound between $50 and $100 per tonne in the past five years and a cost profile under $40 per ton, it means management was locking in 40% plus EBITDA margins with their hedge. That is a great margin relative to historical industry averages for this business.

Ultimate value here and price on the stock is 100% about the pricing and how much and when they are able to ship and at what average prices - completely unpredictable but I tend to agree that they likely trade up in to the 30's (and it will never stay there as these prices will come back to earth at some point).

[doctorslernon]

@Midwest Corp Finance Pro The hedging I can get but the lack of liquidity is what I'm bothered by. They have been issuing shares left & right while in a high price environment. Where is all this cash going to?

[SPC2]

@doctorslernon That is a great question and one that I can't answer with any certainty. Working capital costs likely up a good deal, the hedge margin call pulled down $500M. A company that size in volatile times needs to have a substantial line of credit. I do wonder about using equity via the ATM issuances, etc.

[soral a raison]

Another reason for the dump is that the stock got overextended on friday. It was trading at 15 only 2 weeks ago.

[Pentacoff Investments]

I'm no expert but two relevant passages in the press release are:

"Under the company’s derivative contracts, cash collateral is returned to the company upon reductions in the underlying market coal price or as the company delivers seaborne thermal coal into the market at spot prices..."

"With the exception of the 1.9 million metric tons at Wambo priced at $84 per metric ton, export sales from Peabody’s seaborne thermal segment are largely unpriced and will benefit if the current pricing environment persists. In 2021, Peabody’s seaborne thermal segment exported 8.7 million metric tons and generated revenue of approximately $762 million at an average realized price of $87.51 per metric ton."

Unless I misunderstand the press release, this is a temporary collateral posting given the extraordinary pricing in their seaborne thermal segment, which appears to be 22% hedged in 2022 at $84. They needed to ensure they could finance it - so they setup this relatively punitive facility with GS.

[Boyplunger.com]

@Pentacoff Investments this is correct. It's no different than when your broker asks for more collateral for your margin reqs. It appears, they believe prices will come down or they will be able to sell enough and over a period of time at current spot w/o creating a loss.

[samdehne]

Comment found on BTU blog:

"Uh, yeah, we're making such obscene amounts of money on the products we sell, that the 15% of one product we hedged, at what used to be a great price, is now horribly underwater, so we have to post collateral, until we actually sell the product for that obscene amount of money.
We continue making obscene amounts of money on all our other unhedged volumes."

Market says: OMG they're going bankrupt!!!

Me say: Buy Calls April 23, 24, 25, 26....

[achi3l]

@samdehne Source?

[doctorslernon]

BTU has literally the worst management in the industry. They find new ways to fail constantly. Having to borrow money at 10% to cover your garbage hedge with your product at all time highs for price? That is one I didn't expect.

[energyguy921]

Another company with crap hedges