Peabody is destined to become a test case for who gets left high-and-dry in the aftermath of a foreign-controlled corporate collapse. Should it succumb to Chapter 11 bankruptcy in the US, the ramifications here for the coal sector; for workers, creditors, local communities and mine rehabilitation are immense, yet impossible to determine with any precision.
How Peabody, with its mountain of leverage, negative earnings and vanishing equity could possibly be deemed stable is anybody’s guess, but it is giving it a shot.
Many others such as rival, Swiss-controlled Glencore, are also sweating it out. Glencore Operations Australia revealed $US21 billion ($27.8 billion) in debt at last balance date – although the net position for the labyrinthine group is hard to work out as it doesn’t consolidate its accounts at the top of the corporate tree in Australia – and the coal price has been ravaged since.
Peabody though is in a far more imminent peril. It struck a credit deal last year where it pledged “65 per cent of first tier foreign subs, including Australia, in Peabody Investments (Gibraltar) Ltd to lenders as collateral for a $US1.2 billion credit facility”.
The rest of the Australian assets are controlled by a Dutch entity and the ultimate shareholder is Peabody Energy in the US (whose shares have shrunk from $US1000 to $US2.12 in five years, for a present market value of just $US39 million as of Friday).
What happens if, or more likely when, it hits the wall? What happens indeed when others follow? Will they leave behind a collection of deep pits, the profits long since garnered offshore, and a legacy of acid mine drainage? Peabody’s most recent 10k filing noted:
“Earlier this year, we were notified by several of such counterparties that our bilateral credit lines would not be renewed, which may limit our ability to conduct our corporate hedging activities or to obtain sufficient bank guarantees required by our operations in Australia without posting additional collateral in the form of letters of credit. To the extent that our creditworthiness, as determined by such counterparties, deteriorates further, such credit arrangements may continue to become more costly and/or less available.”
This raises the issue of whether Peabody’s bank guarantees in Australia are sufficient, and whether its lenders will provide guarantees for any revised financial assurance.
David Barnden, a lawyer with Environmental Justice Australia (EJA), warns taxpayers may end up picking up at least part of the chit.
EJA is handing down a report tomorrow that lays out the taxpayer risks for the entire coal industry. As for Peabody, the company confirmed last week to Fairfax Media that it had bank guarantees of $US299 million. Barnden and the EJA have sifted through the group’s publicly available Operations Plans and material from the Department of Environment, and found Peabody’s likely financial assurance comes to $415 million in Queensland and NSW, or $US303 million, yet that excludes the North Goonyella and Wilkie Creek mines for which there is insufficient information.
Peabody would appear mostly – if not fully – funded for mine rehab, perhaps better than others. The variables are many however, including good faith by the banks, and whether Australian assets are siphoned offshore or offloaded to tiny companies as was the case with Anglo American’s sale of Dartbrook to Nathan Tinkler’s ASX minnow Australian Pacific Coal.
Interestingly, indeed paradoxically, Peabody has sought approval to gain 10 per cent discounts on financial assurance for its Burton and Millennium mines, according to the EJA. How Peabody, with its mountain of leverage, negative earnings and vanishing equity could possibly be deemed stable is anybody’s guess, but it is giving it a shot.
Peabody also disclosed in its recent US filings, “Expenditures for post-retirement benefit and pension obligations could be materially higher than predicted if our underlying assumptions prove to be incorrect”.
In a letter to the Australian Securities & Investments Commission, the EJA foreshadowed the use of taxpayer money for mine rehab and asked the regulator to investigate the relationship between Peabody, its Australian subsidiaries and the Gibraltar structure which holds “Mandatorily Redeemable Preference Shares” in Peabody Australia Holdco Pty Ltd.
“In the event that Peabody files for Chapter 11 bankruptcy protection in the USA and if liquidators are appointed to its Australian subsidiary companies, the status of Australian creditors is unclear.”
Moreover the green group raised the risk of “phoenix activity” in the event an Australian subsidiary was “still profitable or has liquid assets, and if profits or assets are transferred to Peabody or other companies”.
The US Chapter 11 process allows companies two years to refinance and trade out of their predicament. However, the thermal coal price appears to be in structural decline, very few coal mines are even breaking even at present coal prices and Peabody’s Australian operations, as well as the head company, are highly leveraged.