Rhino Resource Partners LP has announced that it is entering into an agreement with Royal Energy Resources Inc. to allow it to shift stock around, including all of the outstanding Armstrong Energy Inc. shares owned by Yorktown Partners LLC.
Specifically, the agreement announced Dec. 30 will allow Rhino to buy the Armstrong stock from Rhino Resource Partners Holdings LLC, which is owned by investment partnerships managed by Yorktown. In exchange, Rhino issued 5 million new common units to Rhino Holdings. This will result in Rhino Holdings owning 51% of Rhino's fully diluted common units. If Rhino buys the Armstrong stock, Royal would also have to issue a 51% interest of Rhino GP LLC, the general partner of Rhino which is owned and controlled by Royal, to Rhino Holdings.
The sale of the Armstrong stock depends on whether the bondholders of Armstrong agree to a restructuring of its bonds and whether Rhino can refinance its revolving credit facility.
Until the stocks are bought, Armstrong and Rhino will still operate and be managed as independent entities. The option states that Rhino can buy the Armstrong stock only between Jan. 1, 2018, and Dec. 31, 2019.
Rhino also announced its entry into a new preferred financing agreement with Yorktown portfolio company Weston Energy LLC. The latter will inject $15 million of cash in exchange for series A preferred Rhino units.
Rhino will use the cash to whittle down its debt and possibly to take advantage of the international metallurgical coal rally by expanding its coal production in Central Appalachia. According to the agreement, Rhino must remit 50% of the free cash flow generated by its Central Appalachia operations, subject to an 8% minimal annual rate. The series A preferred units have a five-year term and can be exchanged for Rhino common units after a cumulative return-of-cash threshold is met.
Armstrong's recent earnings losses showed signs of easing up in the third quarter of 2016, though S&P Global Ratings lowered the coal producer's corporate credit rating in October.
Rhino recently entered into an equity exchange with Royal and Yorktown.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.