On Wednesday 13th, Peabody Energy filed for bankruptcy in the US, as it failed to make a interest payment of $71.1m due 16 March 2016. The firm had a 30 days grace period to find a way out of its liquidity problem, and finally ended up filing for bankruptcy.
Commodity plunge
It is no secret: commodity prices, and in particular Oil, Gas and Coal have decreased significantly since early 2015. Here is a chart that shows the evolution of fuel prices (including Crude Oil, Natural Gas and Coal)
Source: IMF
The slight increase since January 2016 was not sufficient to save miners and Oil companies, and the future is highly uncertain: the IMF Commodity Price Outlook and Risks shows high divergence between the expectations of investors. It seems that the latest price is for now the best indicator for tomorrow's price.
The club of bankrupt miners
Peabody is the fifth mining company to file for bankrupcy since 2015, joining Patriot Coal, Alpha Natural Resources, Walter Energy, Arch Coal and James River Coal. An interesting graph expliciting the reasons for the bankrupt is the following, showing the inverse correlation between Peabody's net financial debt and the commodity index that we displayed earlier:
Sources: IMF, SEC fillings, own calculations
The correlation is -0.75 for the period on display. We do not need to try to establish any causality here: the very fact that commodities get cheaper while Peabody gets deeper and deeper into debt is a clear enough sign of distress, and explains the bankruptcy filling which happened earlier this week.
| Company | Bankrupcy date | Leverage | ICR |
| Walter Energy | 15/07/2015 | 191 | 0,05 |
| Alpha Natural Resources | 03/08/2015 | 54 | 0,72 |
| Arch Coal | 11/01/2016 | 16 | 0,72 |
| Peabody Energy | 13/04/2016 | 16 | 0,83 |
Source: latest SEC filling before bankrupcy filling, own calculations
It is very clear here that all these firms had some serious trouble: most of them had extremely high leverage levels. Not only were the debt of these firms enormous, but their operating income were far too low to sustain them. The Interest Cover Ratio (ICR) also goes in this direction: the operating income (EBITDA) was not strong enough to cover the interest expenses generated by the huge amount of debt (safe levels of ICR are generally considered to be above 2 or 3).
This spread of defaults may keep going throughout the year. The conference of Doha to be held tomorrow might seal the fate of several commodity companies, miners and oil producers, in particular shale gas companies in the US, which have high operating costs and large debt.
Further readings
- Wall Street Journal article on Patriot Coal bankrupcy
- IMF's reports on Commodity Price Outlook and Commodity Markets
- Financial Times article on the Doha summit
- The Economist article on Peabody's bankruptcy