What Moody’s thinks about Walter Energy’s credit rating

By

Oct. 16 2014, Updated 1:00 p.m. ET

Deteriorating risk profile

Rating agencies such as Moody’s Corporation (MCO) and S&P (MHFI) rate corporations on their creditworthiness. The rating scale runs from AAA to D for Standard & Poor’s and Aaa to C for Moody’s, with AAA/Aaa corresponding to highest safety while D/C corresponding to default. Standard & Poor’s downgraded Walter Energy, Inc. (WLT) to CCC+ in June 2014 from B- while Moody’s downgraded the corporate rating on Walter Energy to Caa2 from Caa1 in July 2014. Both the ratings fall in a highly speculative (JNK) category, just above the default category. Both agencies have stated high leverage, cash burn, and liquidity concerns as the main reasons for the rating change. We looked at these issues in the Part 3 of this series.

 

Falling stock prices

Article continues below advertisement

Another worrying issue is the falling stock prices. While all coal stocks have lost ground since the beginning of 2014, Walter Energy is by far the worst performer, with a 91% drop in stock price to $1.52 now. Market capitalization has fallen from a billion dollars at the start of the year to just around $100 million dollars now. It is worth noting that the market capitalization is much less than the company’s $2.9 billion debt ($3.2 billion if we factor in new notes issuance discussed in the previous part).

On the other hand, the company holds $2.9 billion in mineral interests, according to its books. If the outlook for met coal remains weak, the mineral interests may be worth a lot less than book value. In such a scenario, if the company goes into liquidation, the shareholders may be wiped out.

Probability of default

Probability of default, or PD, measures the likelihood of an entity defaulting over a specified period. PD calculation takes into account various parameters such as leverage, liquidity, stock price, and so on. Walter Energy’s probability of default has increased substantially in the last few quarters. This is partly attributable to the weaker outlook for met coal, and partly on account of weak financials and stock prices.

According to the widely used Merton model, the implied market value of a company’s assets drop with the fall in its stock prices. While asset value drops, debt remains steady. This leads to higher likelihood of default.

Alpha Natural Resources, Inc. (ANR) is another highly leveraged coal producer that mines met coal from the Appalachian. Read on to learn more.

Advertisement

More From Market Realist

  • Upstart logo
    Financials
    Upstart Stock Jumps on Strong Earnings, Buy at a Discount
  • Woman using a smartphone and laptop
    Financials
    Investing in TQQQ Versus QQQ ETF: Which Is Right for You?
  • PancakeSwap logo
    Financials
    PancakeSwap (CAKE) Price Prediction: $100 Milestone Is in Sight
  • Cartesi logo
    Financials
    Cartesi's Price Is Rising, Looks Like a Good Crypto Investment
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.