S&P Global Ratings lowered its issuer credit rating on Peabody Energy Corp. from BB- to B+, with a stable outlook, amid the company's lower sales volumes and price realizations.
The rating agency expects Peabody's cash flow and leverage to "deteriorate" given declining domestic and weakened seaborne coal markets, according to a Dec. 9 report. It projects that the company's leverage will increase to 3x to 3.5x in 2020 and stay above 3x in 2021 as volumes and realizations decline.
Ratings also lowered its issue-level rating on the coal mining company's senior secured debt from BB to BB-.
"The stable outlook reflects our view that Peabody's lower sales volumes and price realizations will continue to erode cash flows in 2020 even though contracted tonnage in 2020 provides some earnings stability in the next 12 months," rating agency wrote.
Peabody is expected to decrease its output in all U.S. mining complexes as utilities move away from coal and demand drops, pressuring producers to idle their operations. As a result, domestic sales volumes are projected to drop by about 6% in 2020 following an 11% decline in 2019. Though the company has about 75% of its 2020 volumes contracted, Ratings expects price realizations to decline between 9% and 10% in 2020 as higher-priced contracts roll off the books. The rating agency also noted that the costs of idling the North Goonyella metallurgical coal mine in Queensland reduce Peabody's Australian operations' profitability.
The company's free operating cash flow is expected to total between $160 million and $180 million in 2020, a nearly 60% decline from 2019. Ratings forecasts that Peabody will end the year with negative discretionary cash flow given nearly $560 million in shareholder distributions. It is also expected to retire at least $200 million in outstanding debt and has $1 billion of senior secured notes due in 2022 and 2025 that are "trading at a discount to par," according to the report.
"We believe that declining domestic thermal coal demand and low international prices could limit the company's access to financing and could lead to repurchases of some of its debt at a discount to par," the report states. "We believe that credit markets may be less receptive to coal companies in the future as institutional investors and banks have decreased or committed to divesting coal investments."
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.