Peabody Energy Corporation (BTU) is rated Ba3 by Moody’s Corporation (MCO) and BB- by Standard & Poor’s (MHFI). Moody’s recently downgraded its rating from Ba2 with a negative outlook. The negative outlook stems from the weak outlook for the met coal business, as well as the highly leveraged capital structure of the company.
Moody’s feels that the company will burn cash for the next few quarters because there’s no recovery for met coal prices in sight. Also, Peabody Energy’s Australian operations are currently dragging its performance down.
Peabody Energy’s stock is down 48% from the beginning of the year, trading at $10.11 on October 12. During the same period, the SPDR S&P 500 ETF (SPY), which mirrors the broad based S&P 500, gained 4.17%.
As noted earlier, stocks of companies with a higher share of revenues from met coal have lost more since the beginning of the year. Peabody Energy’s performance confirms this assertion. It has lost less than Walter Energy, Inc. (WLT), Arch Coal Inc (ACI), and Alpha Natural Resources, Inc. (ANR), but more than Cloud Peak Energy, a pure-play steam coal producer.
Peabody Energy’s market capitalization stands at $2.74 billion.
Probability of default
Due to its diversified product profile, comfortable liquidity, relatively higher valuation, and spread-out debt maturities, the probability that Peabody Energy will default on its loan is much lower than the companies we looked at in Parts 2 to 10. Meanwhile, if seaborne met coal prices tighten more as a result of Chinese import tariffs and continued oversupply, this probability could increase.
On a positive note, the company’s American operations, especially the western ones, are currently doing well.
In next three parts, we’ll take a look at Cloud Peak Energy.