Adani and Shenhua are still pursuing their spanking new coal projects, Walter-Mitty-like, while the financial position of established coal juggernaut Peabody Energy has become ever more parlous.
Now in Chapter 11 bankruptcy, the US coal group just released its first-quarter results, which show losses running at more than $100 million a month. As its pre-tax losses doubled to $US228 million for the three months, its net debt soared to $US462 million.
What with the decision of Anglo to pull up stumps and put its coal mines on the market, and with the teetering finances of Peabody, there are definitely some cheap coal mines up for sale, mines already operating.
Although the government and Peabody seem to be running the narrative that everything is okay, that Peabody’s Australian operations are ring-fenced from the US bankruptcy, nobody seems to have noticed yet that the company at the top of the group’s corporate tree is yet to report.
Yes, Peabody Energy did hand down its financial statements last week. Yes, this particular entity is solvent. The financial statements of the top company however, Peabody Australia Holdco, are late. A spokesperson told Fairfax Media on Friday they would be filed in due course but was unable to give a date.
The reason this is important is that Holdco is not solvent. Its 2014 accounts revealed negative shareholders’ funds of $3.9 billion and net debt of $5 billion. Current liabilities exceed current assets by a factor of six. That was then. Now things must be worse.
The minuscule interest expense on this debt suggests – though there is little visibility in the accounts – that other entities in Peabody globally are supplying cheap credit, propping up Australia, even though the parent is bankrupt.
As governments, state and federal, pursue their head-in-the-sand policy approach to impending disaster, there are two central questions of public interest which arise: how exposed are taxpayers to the prospective costs of mine rehabilitation and is Australia – which boasts 10 of the Peabody group’s 28 coal mines – really quarantined from the bankruptcy?
Both Tim Buckley, director at green think tank IEEFA, and David Barnden, a lawyer at Environmental Justice Australia, have grave doubts that Peabody’s financial assurance of $US299 million is sufficient to foot the clean-up bill.
“Given the financial leverage and number of Australian jobs involved, maybe this is something our government could investigate rather than taking management’s word for it?” says Buckley.
The EJA’s David Barnden has done an analysis of the opaque offshore structures which control the Australian corporate entities and says Peabody’s assets here are probably exposed to the bankruptcy. Further, they are a large part of the reason Peabody is bankrupt.
In its Chapter 11 documents from April 13, Peabody named two companies in as debtors. One was the US parent, Peabody Energy Corp, the other a Gibraltar subsidiary, Peabody Holdings (Gibraltar) Limited. A long list of US subsidiaries was included in a schedule to bankruptcy motion. When it announced the proceedings, the company said none of its Australian operations were listed and none of its creditors had direct security interests in its Australian assets.
How this could be the case when almost a third of its mines are located in Australia is difficult to comprehend, especially since the 2014 accounts showed its operations here made a $1.2 billion loss ($800 million the year before).
“The reality is obscured by a web of internal financing companies and holding companies registered in offshore financial centres,” says Barnden. These include three entities in Gibraltar.
Some $US5.5 billion dollars was owed by its Australian operations to an internal financing subsidiary registered in the US. This inter-company debt, considered an asset by the US financing subsidiary, secured an external $US2.85 billion finance facility negotiated with Citibank in 2013.
Peabody’s internal US financing subsidiary is listed in the bankruptcy motion schedule, as is a second US financing subsidiary which funnels the inter-company debt from Australia. The pledge to Citibank for the assets in the first US financing subsidiary was made by a third US-based funding entity, not named in the bankruptcy motion.
On the date the $US5.5 billion in debt was calculated, Peabody’s total external debt was $US6.3 billion. Three and a half months later, its bankruptcy documents said Peabody owed $US8.8 billion in long-term debt.
Its inter-company financing also obscures a large subsidy for the Australian business, that is, it pays almost no interest on its $US5.5 billion debt.
Before 2013, the Australian holding company received more than $2 billion in the form of share payments. Those shares were 65 per cent of the total ‘Mandatorily Redeemable Preference Shares’ or MRPS, ultimately held by one of the Gibraltar companies. That equity also secures the $US2.85 billion facility negotiated in 2013. Being ‘mandatorily redeemable’, those shares could be called by creditors via Peabody’s Gibraltar holding companies any time, says Barnden. As such they form the ‘first tier equity’ in the Australian operations. The 2014 accounts classify them as a current liability.
“Peabody’s official position is that its creditors have no direct security interests in the Australian assets. This is akin to Peabody saying it does not hold direct interests in its Australian mines.”
Technically this is true. Peabody’s opaque offshore dealings in low tax jurisdictions means, from a legal point of view, the parent company indirectly owns its Australian operations.
Securing the 2013 $US2.85 billion facility with the Australian first-tier equity was made possible by two Gibraltar subsidiaries that hold and control Australian assets. The first Gibraltar subsidiary signed a pledge to Citibank for the shares of the second. The second Gibraltar subsidiary is referred to in Peabody’s SEC filings as ‘a holding company’ for the Australian assets.
The first Gibraltar subsidiary is named as a debtor in the US bankruptcy motion alongside the US parent company Peabody Energy Corporation. That Gibraltar subsidiary seeks protection from Gibraltar bankruptcy laws, presumably in the hope that favourable US bankruptcy procedures will apply to it.
There is a third Gibraltar-based subsidiary involved. Documents from the Australian securities regulator tell us the third Gibraltar entity holds the first-tier equity of the Australian holding company.
The remaining second-tier equity in the Australian holding company is held by yet another Peabody subsidiary domiciled in the Netherlands.
With this devilishly complicated structure, who could possibly tell which creditors may seek to push their security home and exert a claim over Peabody’s Australian assets?
What we do know is that Chapter 11 is about restructuring, not necessarily winding up. And in a restructuring process, creditors are often asked to take a hair-cut so the beleaguered group can trade out of its troubles. Mine rehab obligations will be part of this negotiation. This is why it is so vital that the full financial position of Peabody’s operations here and its precise exposure to bankruptcy is made known and understood by government. Thousands of jobs depend on it.