Peabody Energy Corp. spent months touting its ability to generate cash for shareholders during a short-lived boom in global coal markets. However, just over three years after emerging from a bankruptcy reorganization that purged $5 billion in debt from its balance sheet, the largest coal company in the U.S. is on the edge of another potential default.

Peabody recently cited a brewing storm of factors leading to "substantial doubt" that it will meet outstanding financial obligations and continue as a going concern. That included weak third-quarter results, additional collateral demands from sureties and the possible violation of terms in its credit agreements. Peabody also faces a swath of other challenges, including a growing list of retiring U.S. coal plants, a recent mine fire in Australia, declining coal asset valuation and a new U.S. presidential administration that could accelerate the decline of the coal sector.

The company reported a net loss in each of the last five quarters. Peabody's share price, which traded at more than $45 per share as recently as mid-2018, has fetched less than $5 per share for most of 2020. The stock closed at $1.50 on Nov. 24.

Joshua Macey, a professor at the University of Chicago Law School who watches the coal sector, thinks it is likely that Peabody will file for another bankruptcy in the next few months. He pointed to the company's struggle to pay debts despite "pretty aggressive attempts" to cut costs, including trimming the company's production footprint and reducing retiree healthcare benefits. Macey also noted that an insurance company sued Peabody to demand that it post more collateral to ensure reclamation obligations.

"That looks like a company on the precipice of bankruptcy," Macey said.

Peabody's cash balance of $815 million as of Sept. 20 was significant, but the company has a high likelihood of violating its financial covenants as it faces other challenges, including pressures from the unprecedented macroeconomic shock in 2020, Moody's Investors Service analyst Benjamin Nelson said in a Nov. 17 note.

"Some type of restructuring is likely in the near term. ... We think all of those facts put together foreshadows some type of restructuring, whether that's mild and out of court or more than that," Nelson said in a Nov. 24 interview.

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The coal mining company recently struck a deal with surety providers resolving $800 million in collateral demands. That standstill with surety providers depends on Peabody completing another deal with lenders over financial covenants it is on track to violate by the end of the year. Peabody can extend the deadline to negotiate with lenders through Jan. 29, 2021, to increase participation.

Peabody spokesperson Julie Gates declined to comment on those negotiations in a Nov. 24 email to S&P Global Market Intelligence.

S&P Global Ratings recently wrote that if Peabody breaches its first-lien leverage covenant in the next six months, it could cause a cross-default under other agreements. Peabody would likely not have sufficient liquidity to repay the $1.6 billion in long-term debt if maturities are accelerated, Ratings added.

Share buybacks now limit cushion in pandemic

Peabody and other coal companies could have entered the financially dire period brought on by the coronavirus pandemic with zero debt, analysts have noted.

In addition to executing $1.34 billion in share repurchases, Peabody touted paying out more than $300 million in dividends in its 2020 proxy statement. The company also suspended its share repurchases in 2019.

When an analyst pointed out past stock purchases and claimed that Peabody "didn't need to be in this tight spot" on an August earnings call, Gates responded by pointing to a change in the market landscape, noting that global metallurgical coal prices had gone from over $200 per tonne to $118/t. While prices have remained low and have even drifted lower, international metallurgical coal benchmark prices have not hit the lows that preceded Peabody's previous bankruptcy filing.

Gates did not respond to an emailed question regarding the company's past decisions regarding share buybacks compared to debt repayments and how that might influence future capital decisions.

A relatively small group of investors owns most of the shares in Peabody. The 10 largest shareholders hold 72.9% of Peabody's common shares outstanding, according to Market Intelligence data.

Elliott Management Corp. is by far the company's largest investor, with an ownership of about 29.6% of Peabody's shares. In February, Peabody struck a deal giving the hedge fund two spots on Peabody's board of directors.

"We are aligned in our objectives of maximizing value creation and shareholder returns," Peabody President and CEO Glenn Kellow said at the time.

Recent setbacks

In its 2020 proxy statement emphasizing the company's key highlights, Peabody highlighted the announcement of a transformational joint venture of Wyoming and Colorado coal assets with Arch Resources Inc., the integration of the Shoal Creek mine and an assessment of commercial opportunities for its North Goonyella mine. Since that filing, a court rejected the joint venture, Peabody temporarily idled the Shoal Creek mine and the company pushed out the expected return of North Goonyella by several years compared to initial estimates.

A fire halted production at North Goonyella, one of the company's most profitable operations, and the delayed return provoked a class-action lawsuit by shareholders. More than a dozen law firms have put out calls for shareholders to join the suit, claiming that Peabody failed to disclose adverse facts around safety practices at the mine.

"At the beginning of the class period, the North Goonyella mine reported record production output," the complaint filed in the U.S. District Court for the Southern District of New York claims. "While defendants touted these results, they misled investors about the sustainability of North Goonyella's coal production by failing to disclose that Peabody's inadequate safety measures had put the mine at a heightened risk of complete shutdown."

Regarding the suit, Gates said Peabody is "confident our disclosures have been proper."