Fitch Downgrades Peabody Energy Corp's IDR to 'BB-'; Outlook Negative

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has downgraded Peabody Energy Corporation's (Peabody, NYSE: BTU) Issuer Default Rating (IDR) to 'BB-'from 'BB'. A complete list of rating actions follows at the end of this release.

The Rating Outlook remains Negative. Fitch believes the coal markets are at or near the bottom of the cycle and should begin to show a slow recovery. The Negative Outlook reflects the possibility that overcapacity persists in the metallurgical coal market and the hard coking coal benchmark price remains below $150/tonne (t) beyond the next 12-18 months. Fitch expects leverage could be above 4.5x through 2016.

KEY RATINGS DRIVERS

The downgrade results from Fitch's expectations for leverage to be above 4.5x during a prolonged period of oversupply in the seaborne coal markets.

Company Profile:

Peabody's credit ratings reflect large, well-diversified operations, good control of low-cost production, exposure to high-growth markets in Asia, top-line visibility in the domestic market, strong liquidity, and high financial leverage.

Peabody is the largest private-sector coal company, globally, with interests in 27 active mining operations producing primarily low-sulfur thermal coal from the Powder River Basin (PRB; 134 million tons sold in 2013,), high-heat thermal coal from the Illinois Basin (IB; 26 million tons sold in 2013), and thermal and metallurgical coal in Australia primarily for the Pacific Basin seaborne markets (16 million metallurgical tons sold, 19 million steam tons sold in 2013). Proven and probable reserves are 8 billion tons.

Peabody is targeting 2014 U.S. volumes at 185 million to 190 million tons with essentially all of those volumes committed and priced. Based on projected 2014 production levels, 85% of 2015 U.S. volume is priced and 40%-50% of 2016 volume is priced.

Industry Risk:

Steam-coal demand in the U.S. is recovering, supply has been disciplined, stocks are falling and prices are improving going forward. Globally, both metallurgical and steam coal are in excess supply and prices are weak. Coal producers have been running for cash with a focus on reducing costs, which has delayed price recovery. In particular, Fitch believes the hard-coking coal benchmark price could average below $135/t and the Newcastle steam coal benchmark average below $85/t beyond 2015. The industry is consolidating, which should benefit supply/demand dynamics longer term.

Expectations:

Fitch believes operating EBITDA could drop to $780 million for 2014 on lower average metallurgical and seaborne steam coal prices. Under the same assumptions, negative free cash flows (FCF) could be as much as $170 million. Peabody guides to 2014 capital expenditure of $200 million to $220 million before coal lease expenditures ($280 million in 2014). Interest expense runs about $400 million and dividends are about $92 million, annually. Management believes low capital spending levels can be maintained for several years.

Fitch believes that earnings could improve in 2015 with improved cost performance in Australia and market improvement in the U.S. but that debt repayment could be elusive through 2016. Beyond that period, Fitch expects no further federal coal lease expenditures and the end of Patriot VBA payments, which together free-up $350 million in cash flow.

Financial Flexibility:

At Sept. 30, 2014, cash and equivalents were $466.5 million and liquidity was $2.3 billion. The company has a $1.65 billion secured revolving credit facility maturing on Sept. 24, 2018, or Aug. 15 2018 if the $1.5 billion 6% senior notes due in November 2018 remain outstanding. Utilization was $115 million for letters of credit at June 30, 2014. The company also has a $275 million accounts receivable securitization program maturing in April 2016 which had $95 million available at June 30, 2014. Revolver covenants include an interest coverage minimum of 1.50:1 through Dec. 31, 2015 with step-ups thereafter and a maximum net secured leverage ratio of 3.50:1 through Dec. 31, 2015 with step-downs thereafter. Fitch anticipates that Peabody will operate within its covenants.

Scheduled maturities of long-term debt are estimated at $32 million in 2014, $19 million in 2015, $666 million in 2016, $12 million in 2017 and $1.5 billion in 2018.

Capital Structure

Total debt with equity credit of $6 billion compares to preliminary LTM Sept. 30, 2014 operating EBITDA of $759 million at 7.9x. Fitch expects Peabody to focus on debt repayment while leverage is above 3x but thereafter to invest in Australia and Asia to the extent of its FCF.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Expectations of operating EBITDA less than $700 million in 2015;

--Expectations of negative FCF in 2016;

--Expectations of total debt/EBITDA greater than 5x in 2016;

--More than $200 million of additional debt.

Positive: Future developments that may lead to a positive rating action may include:

--Rationalization of excess supply in the seaborne metallurgical and steam coal markets resulting in improved prices.

Fitch has downgraded Peabody's ratings as follows:

--IDR to 'BB-' from 'BB';

--Senior secured revolving credit and terms loan to 'BB' from 'BB+';

--Senior unsecured notes to 'BB-' from 'BB';

--Convertible junior subordinated debentures due 2066 to 'B' from'B+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology' (May, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=909254

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