Peabody Energy's (BTU) 10-K filing with the Securities and Exchange Commission contained a disclosure that could become increasingly common for commodity producers: the "going concern" qualification.
On Wednesday, the St. Louis-based coal producer announced that it may not be liquid enough to sustain operations and continue as a going concern, and said in the filing that it may seek Chapter 11 protection. Peabody follows in the footsteps of Texas-based oil and gas company Linn Energy (LINE), whose 10-K, which was released on Tuesday, included similar disclosures.
The company also announced that it had elected to enter into a 30-day grace period on $71.1 million in interest payments on debt that was due on Tuesday. The notes affected, a 6.50% senior note due September 2020 and a 10% senior secured second-lien note due March 2022, are priced at $0.066 on the dollar and $0.075 on the dollar, respectively, according to data compiled by Thomson Reuters. Failure to make payment within the 30-day grace period would constitute an event of default.
As of Dec. 31, 2015, the company's total debt load was $6.3 billion, and is rated well into "junk" territory -- at CCC+ by Standard & Poor's Ratings Services.
Additionally, Peabody Energy is in danger of being in default on its 2013 credit facility due partly to the inclusion of the "going concern" qualification. If the company is unable to obtain a waiver from its lenders, the outstanding balance under the credit facility could become due immediately. Its borrowings under the facility total $2.85 billion: $1.19 billion in term loans, $945 million borrowed in February for general corporate purposes and $710 in outstanding letters of credit.
"As a result of these factors, as well as the continued uncertainty around global coal fundamentals, the stagnated economic growth of certain major coal-importing nations, and the potential for significant additional regulatory requirements imposed on coal producers, among others, there exists substantial doubt whether we will be able to continue as a going concern," Peabody said in Wednesday's filing.
Earlier this month, The Deal reported that Peabody's covenant compliance could be at risk if the company was unable to complete the sale of its El Segundo and Lee Ranch mines. At the time of The Deal's report, the buyer, Bowie Resources Partners, was having trouble securing financing to complete the transaction. In Wednesday's filing, Peabody said the transaction was expected to close by the end of the first quarter, which would be in two weeks.
Given Peabody's "going concern" disclosure, completing this sale could go provide some breathing room.