Weakening export markets and accumulated debt could bring more pain to the U.S. coal market, especially for a pair of top producers now under tight lender-imposed deadlines to sort their financial situations.
Five years ago, Murray Energy Corp. Founder and CEO Robert Murray vowed to be the "last man standing" in coal and has since criticized his competitors for resorting to bankruptcy reorganizations that discharged debt and avoided financial obligations. In the past few days, his company and Murray Energy-controlled Foresight Energy LP missed debt payments and the clock is ticking to make a payment or work out a deal with lenders to avoid default.
Together, coal mines controlled by Murray Energy mined about 11% of the coal in the U.S. in the first half of 2019, according to an S&P Global Market Intelligence analysis. The company's production represents a significant slice of coal mined in both the Northern Appalachia and Illinois basins, but the company also has operations in other Appalachia coal basins and the Uinta Basin.

Murray Energy recently negotiated a forbearance period through Oct. 14 to work with lenders after electing not to make amortization and interest payments due Sept. 30. Foresight, which is controlled by Murray Energy, previously took similar action, initiating a 30-day grace period to find more time to pay an approximately $24.4 million interest payment.
"Foresight's capital structure is not sustainable amid a sharp reduction in pricing for export thermal coal in 2019 and intensifying competition for declining domestic demand," noted Ben Nelson, a senior credit officer and vice president with Moody's Investors Service, in an Oct. 1 rating action that downgraded the company from CFR to Caa2. Moody's also placed the company on review for a further downgrade.
S&P Global Ratings also downgraded Foresight to CCC- due to the potential for default due to nonpayment or restructuring even though the company appears to have sufficient liquidity to make its payment.
"However, we believe that given lower domestic thermal coal demand and persistently low international prices, the company may not have sufficient liquidity to make its next interest payment under the first-lien term loan," S&P Global Ratings analyst Vania Dimova wrote. "In addition, the deep discount on Foresight Energy's secured debt prices and waning capital markets access will likely lead to restructuring in the next 90 days. We now think that the business risk of the company is vulnerable because of these risks."
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Avoiding bankruptcy reorganization
Missed debt payments have been an early warning sign that coal companies may be heading toward a bankruptcy court restructuring in recent years, though several options for reconfiguring both of the company's finances could still be on the table. In an Oct. 2 news release, Murray Energy said the forbearance period would allow for conversations with lenders to "strengthen the company's business, improve its liquidity position, deleverage its balance sheet, and achieve a more sustainable capital structure."
Murray sat down for an interview with S&P Global Market Intelligence in late 2016 in which he laid out his plan for keeping the "best coal company in the world" out of bankruptcy. The coal executive, who supported President Donald Trump during his campaign and maintained close ties to the administration, said at the time that he expected coal demand to decline. Still, he also blamed some of the industry's woes on coal companies who took on lots of debt and began dragging healthier companies into the "bankruptcy sewer" by keeping mines open and discharging their debts in court.
His "four-point plan to avoid bankruptcy" was to deal with debt accumulated from acquiring a major stake in Foresight Energy, strike a deal with its union labor force, draft contracts that help customers dispatch electricity and renegotiate covenants in his debt.
"We've completed all of the four steps we need to survive," Murray said at the time.
Shortly after Trump was elected, Murray Energy warned the company could be forced to file for bankruptcy if the administration did not take efforts to avoid the retirement of coal-fired power plants owned by FirstEnergy Solutions Corp., which had filed for bankruptcy reorganization. The company also pushed for broader federal intervention to slow coal retirements. Murray backed off of those claims after a refinancing that he said protected the company's investors.
Rare growth in coal
While other coal companies were suffering, Murray was growing his coal empire. In 2013, the company entered into a $3.5 billion deal to acquire five longwall coal mining operations from Consol Energy Inc. Later, Murray would buy a controlling stake in the Illinois Basin-centered Foresight Energy and scoop up assets out of bankruptcy sales like the Armstrong Energy Inc.'s Illinois Basin thermal coal mines. Earlier this year, the company made its first foray into metallurgical mining with the bankruptcy sale acquisition of mines from Mission Coal Company LLC.
Murray Energy recently overtook Cloud Peak Energy Inc. as the third-largest coal producer in the United States. The company is the largest, by production volume, to avoid a bankruptcy reorganization in the last three years as dramatically decreased coal demand and high debt loads have pushed companies to restructure. This year alone saw several bankruptcy filings in the coal sector, including those of Cloud Peak, Blackjewel LLC, Blackhawk Mining LLC and Cambrian Coal Corp.
In 2018, Murray Energy entered into a transaction support agreement with some of its lenders that Moody's deemed a "limited default." S&P Global Ratings issued a similar determination because it implied investors would receive less value than originally promised and because it was a distressed, rather than opportunistic move.
Recent decline
Coal companies, particularly those operating in the Illinois Basin, have been supported in recent years by a rise in export demand. However, global demand for U.S. thermal and metallurgical coal has been deteriorating in recent months.
"Once we were convinced that export prices were going to stay down, we flagged Murray and Foresight specifically … as they are highly exposed to what's happening in the export market, combined with being heavily leveraged," Nelson said in an interview.
Joe Aldina, director of U.S.
"These guys thought the export boom would go on forever and it's really been only a one- or two-year phenomenon," Aldina said. "With European prices down to where they're at, it's not that no Illinois Basin coal will flow, but its a lot more competitive."
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.

