Coal companies, many already in rough financial shape, are more likely to default in the wake of the COVID-19 pandemic.

The one-year market signal probability of default in the coal and consumables fuels industry increased sharply in early 2020, according to an analysis by S&P Global Market Intelligence using its newly launched Marketplace database. The figure has stayed well above any levels recorded in 2019 since surging in February and March.

"I think the significant weakening in demand increases the likelihood of financial stress, for coal companies and the coal industry," Benjamin Nelson, senior credit officer and lead coal analyst at Moody's, said in an interview. "It probably speeds the secular decline that we've observed over the past decade."

The one-year market signal probability of default is a measure of the odds a company will default on its debt within 12 months based on changes in share price and other risks.

Three of the 10 large, publicly-traded U.S. coal companies analyzed had at least a one-in-three probability of defaulting within two years. Only one company, Natural Resource Partners LP, had a one-year market signal probability of default below 10%.

"Most, if not all, coal companies that operate in the U.S. were in weak financial shape before the arrival of the pandemic, as thermal coal consumption was already in steep decline and coal-export prices were weak," Seth Feaster, a data analyst for the Institute for Energy Economics and Financial Analysis, wrote in an email. "Now, it appears that during March, April, and May, the core months of the pandemic shutdown, the first choice of many electric utilities was to cut coal generation in response to lower power demand, while taking advantage of increased generation from renewables and low gas prices."

Coal fueled roughly half of the nation's electricity generation as recently as 2008, but its share fell to about 15% in April and May, Feaster pointed out.

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Some coal mining companies, such as larger producers with a broad customer base and those that have shed debt in bankruptcy court, may be more likely to survive, Feaster said. Companies serving certain plants that are unlikely to shift to gas soon and companies with lower costs and access to credit also have an advantage, but that is "a pretty short list of coal companies," he added.

"Until there is some level of consolidation among existing companies, and until the massive oversupply of productive capacity is addressed through mine closures, the entire sector will remain weak financially," Feaster said. "It's unlikely that the financial crisis in the coal industry will be over anytime soon."

Coal companies with higher risks of default based on the market signal value span mining regions and coal types.

Illinois Basin thermal coal producers Hallador Energy Co. and Alliance Resource Partners LP had a 30.2% and a 29.2% market signal probability of default as of May 18, respectively. Central Appalachia metallurgical coal producer Contura Energy Inc. had a 31.8% market signal probability of default. Peabody Energy Corp., the largest producer in the U.S. by volume, had a 21.2% market signal probability of default despite emerging from a bankruptcy reorganization in 2017 that reduced over $5 billion in debt.

Industry observers are keeping a close eye on liquidity as produces batten down for declining demand in 2020.

"If you look across the coal portfolio in the aggregate, we think free cash flow will be negative across the whole portfolio," Nelson said. "As we look across the landscape, we see pretty significant cash burn, which is meaningfully different from what we saw in 2017 and 2018."

In 2017 and 2018, coal companies, many newly restructured through a bankruptcy reorganization, were generating cash and funneling it toward dividends and share repurchases. This year will instead be characterized by cash consumption as coal companies scramble for alternate sources of liquidity, Nelson said.

Before the company he owns filed for bankruptcy, Murray Energy Corp. founder Robert Murray said coal companies were dragging their peers into a "bankruptcy sewer" by continuing to operate assets by discharging debts. Bankruptcy judges have allowed coal assets of questionable value to continue to produce regardless of whether they had any residual value, said Joshua Macey, a visiting assistant professor of law at Cornell University who has studied coal bankruptcies.

"Today's coal industry is increasingly dominated by underfunded companies that sprang up to acquire liabilities that the larger companies did not want to be responsible for," Macey said. "These companies never had any chance of surviving and only exist because bankruptcy judges and environmental regulators turned a blind eye in the hope that there would be a dramatic industry turnaround that would not leave taxpayers on the hook for hundreds of millions of dollars in cleanup costs."

The effects of the wave of coal bankruptcies that have swept over nearly the entire sector in the U.S. have already been far-reaching. Employees and retirees of coal companies have lost promised retirement, health care and pension benefits. Communities also miss out on tax revenue and face potential challenges around unaddressed environmental concerns.

Michael Bauersachs, CEO of Ramaco Resources Inc., said on a May 13 earnings call that capital markets for coal are "basically being closed." Bauersachs said producers have also cut back production, reduced shifts and wages, and continue to carry high production costs. He predicted more coal companies could soon file for a reorganization.

"The realities of the current market continue to discourage investment and it looks more and more likely there will be failures and potentially more bankruptcies among our competitors," Bauersachs said. "In our experience, bankruptcies in this type of setting look more like Chapter 7 liquidations than Chapter 11 reorganizations."