Peabody Energy Takes Steps to Avoid Bankruptcy Filing

Getting an ailing company back on its feet requires many steps -- just ask Peabody Energy (BTU).

In the span of one hour Thursday morning, the St. Louis-based coal producer released three statements that can affect its already strained financial situation. The news includes layoffs, a reduction in its credit and an extension of negotiations for one of its planned asset sales.

As a reminder, earlier this month, Peabody released financial statements for 2015, which included a "going concern" qualification. Peabody also announced then that it elected to enter into a 30-day grace period on $71.1 million in interest payments that were due on its debt.

Now Peabody announces that due to "challenged" market conditions, which include an oversupply of natural gas and a mild winter, it will be laying off 235 workers from its mine in the Powder River Basin in Montana and Wyoming. The layoffs represent approximately 15% of the mine's workers.

The layoffs follow an announcement that Peabody's purchase-receivables agreement has been revised. Such agreements allow companies, in this case Peabody, to sell its accounts receivables -- sometimes at a discount -- and receive cash up front from the purchaser, rather than wait for its customers pay. Under such arrangements, default risk is transferred to the purchaser, who can earn a profit on the spread between what it paid to the seller and what it received from the seller's customers. When times are good and default risk is lower, the agreements are more favorable.

As we know, however, Peabody's financial situation is tenuous.

Among the many revisions to the agreement, the most critical was the reduction of the allowed borrowing base to $180 million from $275 million. At the time of Thursday's filing, Peabody had $170 million in letters of credit outstanding, meaning that its ability to borrow further was effectively cut off.

But one announcement Thursday offered a faint glimmer of hope.

Peabody has been trying to sell coal assets in New Mexico and Colorado to Kentucky-based Bowie Resource Partners. Proceeds of the transaction are crucial for Peabody to remain in compliance with its debt covenants, as The Deal reported earlier this month. Unfortunately, Bowie has had difficulty securing the financing necessary to complete the transaction.

In an effort to save the deal and buy more time for both parties to seek other cash or non-cash payment arrangements, Peabody and Bowie waived their termination rights under the purchase agreement. Peabody waived its rights until Apr. 7 while Bowie waived its rights until Apr. 15.

If an agreement can be reached and financing is secured, Peabody's financial situation could improve. Until then, Peabody's outlook remains murky.

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