On May 22nd, Patriot Coal (PCX) announced that it had engaged The Blackstone Group "to achieve an optimal financing package." Here is the chart of the opco Senior Notes:
I have covered Patriot Coal, in one form or another, since their spin-off from Peabody in 2007. My more mean spirited friends and colleagues like to remind me how I got long the stock in late 2008 in the mid-teens only to see it fall to a price ~$3. I held on, added to the position, and eventually sold out in early 2010 (luckily). Since then, I have not established a position across the capital structure.
When Patriot Coal first announced a new bank deal to refinance their convertible notes due 2013, I began to look under the hood at the situation given the attractive terms that the new deal was being marketed. I had a few inbound suggestions that the best play here was to short the converts on the deal falling apart. The trade made a lot of sense: very little downside of 1-1.5 points, with big upside if the deal did indeed fall apart. Unfortunately I was a tad late to the game and there was no borrow.
And then the deal fell apart and the converts proceeded to drop 40+ points, now trading in the low 60s from a price of 98/99.
Coal has a rich history in distressed "war stories." Many people point to the success Wilbur Ross had building ICO which was eventually sold to Arch Coal at the absolute top of the met coal market since the crisis. And now analysts are sharpening their pencils again with sentiment caused by the PCX news sending ripples throughout the prices of capital structures across the space, with specific names such as James River and Xinergy, as well as the majors (moreso in the equities).
Patriot Coal's near term situation is difficult to handicap. They have an impending maturity a year away of hold-co, non guaranteed debt. They have a few options:
- Exchange / Refinance converts for more senior opco debt
- Exchange converts for equity
- Extend converts for like converts of a longer maturity
- Sell assets and refinance converts
- Near Term Bankruptcy: 35%: 0
- Exchange / Refinance into Second Lien Debt: 15%: 90 - assume if they refinance = par, if convert they trade to 80, splitting difference
- Debt for Equity Exchange: 15%: 75 - probably the hardest to figure out...i.e. what kind of market cap does this thing have, what's dilution of current equity, etc.
- Conversion into New Holdo, higher coupon, but longer maturity Convert:: 25%: 75
- Sell Assets, Refinance Converts: 10%: 100