Fitch: US Coal Defaults Herald Tighter Rules for Self-Bonding

NEW YORK--(BUSINESS WIRE)-- Self-bonding has been called into question again in the wake of Peabody Energy's announcement that it would likely be in default of its credit agreements, evidencing senior secured debt in the amount of $2.8 billion, according to Fitch Ratings. Citizen complaints, scrutiny from the attorney general of Illinois and congressional calls for investigation follow a record number of financial defaults in the U.S. coal sector foreshadowing even tighter self-bonding rules.

Peabody elected to exercise the 30-day grace period in relation to a $71.1 million semi-annual interest payment due March 15 on $1.65 billion in notes. The company anticipates that it will continue to generate negative cash flows from operating activities, raising substantial doubt about whether the company will be able to continue operations. Peabody Energy's subsidiaries qualified for $1.4 billion in reclamation self-bonding as of Dec. 31, 2015.

As citizen complaints mount that stressed and bankrupt miners have insufficient reclamation bonding, there is virtually no ability for distressed miners to provide additional support. Fitch believes 2016 will be the fifth consecutive year of falling prices and volumes for U.S. coal producers. Those with substantial interest costs or capital commitments will likely rely on liquidity to support operations including performance of reclamation activity.

The inability to provide additional surety for reclamation obligations when required can result in permits being revoked or suspended, but regulators are working with miners that have good track records to allow operations, reclamation and monitoring to continue. However, Fitch believes the rules will tighten and the practice of allowing self-bonding will eventually become a rarity.

The U.S. coal mining sector continues to undergo massive restructuring with more than 25% of U.S. coal production accounted for by miners having filed for bankruptcy since 2011. Should Peabody Energy file for bankruptcy protection, that figure would jump to more than 40%. As these companies are restructured, successors will retain the reclamation liabilities and the requirement for reclamation bonding. Fitch believes that current asset values are pricing in the requirement to provide third-party bonding and the related security and expense, resulting in lower recoveries than if self-bonding was expected to be more available.

Alpha Natural Resources Inc. (ANR) filed for bankruptcy Aug. 3, 2015 and Arch Coal Inc. (ACI) filed for bankruptcy Jan. 11, 2016 with roughly $411 million and $457 million, respectively, in self-bonding obligations for Wyoming operations. In bankruptcy, the requirement to reclaim can be enforced but the requirement to provide surety for future costs when a company is actively reclaiming according to its plan can be viewed as attempting to enforce a monetary judgement and tends to be stayed.

The Wyoming Department of Environmental Quality's Land Quality Division (LQD) and ANR entered into an agreement on Sept. 8, 2015 and approved by the court on Oct 8, 2015, providing the LQD a $61 million super priority claim, having priority over administrative expenses, to secure reclamation obligations in the case of liquidation. ANR's and its subsidiaries' obligations to perform reclamation under reclamation plans continue.

Along similar lines, the LQD and ACI entered into an agreement on Feb. 9, 2016, which was approved Feb. 29, 2016, providing the LQD with a $75 million super priority claim securing reclamation obligations related to Black Thunder, Coal Creek and Vanguard mines. ACI agreed to substitute their self-bonds with third-party collateral support in the amount of $17 million to secure the reclamation obligations related to the Medicine Bow, Seminoe II, Izita and Carbon Basin mines.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings

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