A new financing transaction executed by Murray Energy Corp. will improve cash flow and extend maturities but will likely be labeled by Moody's as a limited default.
The coal producer announced that it recently entered into a transaction support agreement with holders of its 11.25% senior secured notes due 2021 and lenders of its existing term loans to extend maturities and improve the company's balance sheet.
Moody's issued a report June 5 that said a designation of limited default, which indicates the company failed to meet debt service obligations outlined in original debt agreements, will be appended to Murray Energy's probability of default rating if the transaction goes through, even though the company's credit quality will improve modestly from the transaction.
"The refinancing was negotiated with a majority of the bondholders and term loan lenders who will be exchanging for longer-dated maturities and allows the company to take advantage of current trading discounts in its bonds," the company said in a statement to S&P Global Market Intelligence. "The term loan refinancing is open to all of the term loan lenders and the bond exchange is only open to the bondholders with whom the company has executed transaction support agreements and is not open to other bondholders."
Noteholders with the majority of both the company's outstanding 11.25% senior secured notes and its existing term loans, along with the lenders, agreed to exchange the 11.25% notes for new 12.00% senior secured notes due 2024, at an exchange rate of $740 in aggregate principal amount of new notes for each $1,000 in aggregate principal amount of 11.25% notes exchanged. The new term loans will mature in 2022.
Moody's report pointed out that existing noteholders are receiving notes at a "substantial discount" to par.
The deal will improve the improve the company's balance sheet by cutting debt by just under 10% and reducing interest expense by almost $40 million, the report said. However, the company remains among the "more heavily leveraged" of the rated U.S. coal producers, many of which went through bankruptcy reorganizations in recent years and significantly reduced debt.
"I do look at this deal by Murray as opportunistic," said Benjamin Nelson, the Moody's vice president and senior credit officer who wrote the June 5 note. "There wasn't an imminent issue, so to speak."
Murray Energy said it may consider additional bond exchanges on similar or different terms.
Nelson said the sector's access to capital markets and investors has improved a little following a wave of bankruptcies that scared many investors away. Export markets have been strong and at the same time, support from the federal government has improved sentiment around an industry that is expected to continue to decline domestically.
"I think some of the folks who had stepped away from the industry are starting to put their feet back into the water," Nelson said in an interview.
Higher-rated coal producers have been able to reprice debt and get better deals, but coal companies continue to pay higher interest rates than those in other sectors, Nelson said. His agency's credit rating for Murray Energy, Caa1 stable, is lower than most of the other coal companies it covers, he said.
Murray's new obligation added collateral of Murray Kentucky Energy Inc. and its subsidiaries and Murray South America Inc. as well as Murray Energy's indirect equity interests in Javelin Global Commodities Holdings LLP. Nelson said pledging previously unrestricted subsidiaries is "not something you do unless you need to" to help on pricing or to complete a deal, but he said it is also not abnormal for a company in the same rating spectrum as Murray Energy.
