Patriot Coal (PCX) Files for Bankruptcy

Today was one of the busier days in distressed debt investing for 2012 with an eye-popping bid for Hawker's assets and rumors all day of a Patriot bankruptcy filing which was definitively announced after the close. Tomorrow I will do a post on Hawker and the Superior bid and what it means for recovery, but tonight's post with focus on Patriot Coal's bankruptcy filing.  I first wrote about Patriot Coal a few weeks ago: "Hot Topics in Distressed: Coal Names"

Salient Facts of the Case:

• Main Case Number: 12-12900; Southern District of New York
• Judge: The Honorable Shelley C. Chapman; Previous/currents cases include 4Kids Entertainment, LightSquared, Ambac, InnKeapers, Boston Gen
• Representation: David Polk & Wardwell represent Patriot. Blackstone is serving at their FA. AlixPartners' Ted Stenger will be the CRO.  In the bankruptcy filing, the company also named a conflicts counsel (Curtis, Mallet-Prevost, Colt & Mosle LLP)
• The Patriot Coal claims agent site can be found here: Patriot Coal Claims Agent. 
• 99 Chapter 11 cases were filed today - a motion for joint administration has been put on the docket
• $802M DIP coming with proceeds used to "refinance certain of the Company's obligations under the existing credit facility and the existing securitization facility, and for working capital, capital expenditures and other general corporate purposes"
• The bankruptcy petition for holding company is embedded below

The docket can be found here: Patriot Coal Bankruptcy Docket

In addition, here is the schedule for the entities filing for bankruptcy today:

For readers reference, the guaranteed bonds (8.25% of '18) went out 33.5-34.5, flat. The converts were last quoted at 7.5-9.5, though I saw a buyer at the very end of the day at DB bidding 7. The guaranteed and converts started the day at 41-43 and 31-33, respectively.

Editor Side Note: Last week PCX's equity was up nearly 100%. I had asked around what the hell was going on. I had heard there were multiple buy-ins before the holiday, accelerating when markets opened on Thursday. Bonds during that time really weren't doing much.

CFO Mark Schroeder's Declaration in Support of First Day Motions can be found here: PCX Bankruptcy First Day Declaration. Some take-aways from the document:

• Twelve active mining complexes consisting of nineteen surface and underground mines
• PCX controls 1.9B of proven and probable reserves (including leases)
• LTM 3/31/2012 results: Revenue of $2.33B, Adjusted EBITDA of $164M on 29.4m tons of coal
• Interesting details on their benefit plans: 10,286 primary insureds and 12, 145 beneficiaries for a total of 22,431 individuals covered under the benefit plan. Compare this to an active work of nearly 4,500.
• On Petition Date: $300M LOCs, and $25M direct borrowings under their $427.5M Revolver. $51.8M LOCs against the $125M AR facility. 
• Coal's share of total power generation was down to 36% in 1Q 2012 from 45% in 1Q 2011
• Coal price forecasts: $2.38 per MMBtu in 2012 and $2.30 MMBtu in 2013
• Patriot names the two parties that defaulted on contractual obligations to purchase coal: Bridgehouse Commodities Trading Limited and Keystone Industries - both of which PCX has filed actions against for damages
• Declaration goes on to blame legacy liabilities for one of the reasons for the restructuring; specifically the fact that 42% of PCX's employees are represented by the UMWA (vs 11.4% of the industry) and that brings about restrictions to the the National Bituminous Coal Wage Agreements of 2011.
• PCX currently contributes $12k per year for each unionized employee. This is projected to increase to more than $27k per employee in 2017 and $46k per employee in 2020 (!!! good lord !!!)
• PV of Coal Act liabilities at $140M. Black lung liabilities of $186M looking to go higher due to Obama-Care but these could be put to BTU. $73M in workers comp liabilities. 
• The BTU disclosure is somewhat confusing. Anyone have color on this? Who is on the hook?
• DIP Terms: $125M 'First Out' DIP ABL and Term Loan. 'Second Out' DIP of $302M which will roll existing Letters of Credit under the existing Revolver. New money / liquidity will be approximately $425M which I believe is slightly higher than the market was anticipating.
• Cash is listed at $19.7M as of May 31, 2012
• Numerous Schedules listing Letters of Credit and Security Deposits, Owned and Leases Premises (broken down by type of mine and location)
• Debtor is forecasting a $27M cash inflow for the 30 days following the petition date.
• $25M of Critical Vendor claims (Docket #14)

Depending on how bulled up you are on coal, comps trade anywhere from 4.5x-7.0x 2013E EBITDA. The problem of course with Patriot is that as of today's filing (that I can see) we do not have a good handle on the size of the unsecured claims pool due to lack of clarity on vested vs. unvested post-retirement liabilities (vested can be rejected and therefore establish a claim in bankruptcy). The asset side can be broken down per mine (whether it be thermal / met, leased or owned, CO2 content, etc). It remains to be seen if any of the domestic majors are willing to add capacity in the CAPP; though that's not to say you may not see foreign entities or even steel players come in looking to add some vertical integration (though PCX's vol-B coal is not in high demand today).

I have to think given the size of the DIP, and absent large asset sales for cash generation, the guaranteed bonds will need to step up for some sort of rights offering to keep leverage at manageable levels on an exit. Is there any sort of litigation strategy for the converts against the syndicate that was leading the term loan syndication a month ago or even against BTU for the spin (hail mary?). 

Depending on how juicy / tight the terms of the DIP are, it could be interesting. With no real way to hedge the unsecured guaranteed bonds, there doesn't seem like a lot to do until more information comes out. Will will keep readers updated to our valuation work and would welcome any thoughts if you are working through this bankruptcy as well.

Patriot Coal's Bankruptcy Petition