Walter Bonds Jump From Record-Lows After Debt-for-Equity SwapCharles Mead and Sridhar Natarajan
Bonds of Walter Energy Inc. are climbing from record-low levels after the producer of metallurgical coal said it would issue stock in exchange for debt with $35 million of face value.
While Walter’s stock plunged by as much as 7.7 percent today, its $500 million of 9.875 percent bonds due December 2020 spiked 4.1 cents on the dollar to 67.6 cents at 9:30 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes dropped to 63.5 cents on April 25, before the Birmingham, Alabama-based company announced the plan in a regulatory filing.
The reduction in the outstanding debt will save the company about $3.5 million in interest. That compares with interest expense of $234 million last year, compared with earnings before interest, taxes, depreciation and amortization of $143 million.
An additional 3.15 million shares of stock will be used to retire and cancel the 2020 notes, and Walter “may engage in additional exchanges” as it works to reduce debt and interest costs, according to the filing. The action comes two weeks after Walter said it planned to idle mines in British Columbia after the price of the steelmaking ingredient slumped.
Walter fell 31 cents to $7.11 per share, the lowest in almost 10 years, at 10:56 a.m. in New York, giving the new equity a current market value of $22 million. That means the company is paying about 64 cents on the dollar to redeem its debt.
“They’ve left the door open for further equity raises to retire debt,” said Jeremy Sussman, a New York-based equity analyst at Clarkson Capital Markets who rates the shares “market-perform.” For shareholders, that possibility “is a bit of an overhang in the face of what we believe to be the beginning of a metallurgical coal recovery.”
Walter’s bonds, ranked Caa2 by Moody’s Investors Service and CCC by Standard & Poor’s, remain at distressed levels by affording investors more than 10 percentage points of additional yield relative to Treasuries.
This transaction “indicates a willingness to dilute shareholders to reduce the high debt burden,” said UBS AG credit analysts Srihari Rajagopalan and Shiv Prakash. “In and of itself, however, the transaction does not significantly address liquidity needs.”
It may also become more difficult for the company to carry out similar transactions if the share-price decline persists, the UBS analysts said.