Walter Energy Sells Bonds to Pay Off Loan Limiting Debt

Walter Energy Inc. is turning to the bond market to raise money that will allow the coal miner to pay off a revolving loan that restricts its borrowing capacity.

Walter sold $320 million of debt in an add-on to its $650 million of 9.5 percent, first-lien notes due October 2019, according to data compiled by Bloomberg. It will use the money to repay borrowings on its revolving lines of credit, according to a regulatory filing today.

The new notes, part of a deal initially offered to investors in September 2013, were sold at 99 cents on the dollar to yield 9.74 percent, Bloomberg data show. The securities traded at 101.5 cents on the dollar yesterday to yield 9.12 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The paydown will terminate the loan, ridding the Birmingham, Alabama-based company of a corresponding leverage test that prevented the highly indebted coal miner from accessing the full amount of the revolver, according to Srihari Rajagopolan, a credit analyst at UBS AG.

The company will be left with $77 million of revolving credit, down from $314 million before the transactions, and $43 million will be accounted for by letters of credit, according to a statement from Moody’s Investors Service.

‘Unsustainable’ Debt

The new notes would add to Walter’s debt load, which included $2.92 billion of long-term borrowings on March 31, according to data compiled by Bloomberg. Standard & Poor’s lowered its credit rating to CCC+ from B- on June 27, saying in a ratings statement that Walter had an “unsustainable” amount of debt because of the low price of the metallurgical coal it produces.

Executives of the coal miner told bondholders and lenders on a private teleconference today that after the notes were sold, it would have no more capacity under its credit agreement to sell first-lien debt, according to two people on the call who asked not be named because it wasn’t public. Walter would also give up its ability to issue new second-lien bonds if it acts on an option to pay interest with more debt on its $350 million of 11 percent notes due April 2020, said the people.

The company told investors today that it would continue considering requests to swap debt for equity, the people said. Chief Financial Officer Bill Harvey didn’t immediately respond to a phone message left for comment about today’s call.

Debt Swap

Walter swapped $35 million of its 9.875 percent of $520 million senior unsecured notes due 2020 for $3.15 million in common stock during the first quarter this year, Harvey said during in a public conference call on May 1.

Speculation that shares could be diluted helped send Walter’s stock down 8.6 percent to $5.62 today. Shares have dropped 66 percent this year.

Walter executives on today’s call laid out several cost-saving measures they expect to undertake. The company plans to save at least $20 million in annual capital expenditures from the $130 million it previously told debt investors it would spend, the people said.

Walter began idling its Canadian mines in April after the global benchmark price for metallurgical coal fell to a six-year low of $120 per metric ton. The money-saving measure resulted in a charge of about $7 million related to severance costs, according to today’s filing.

Force Majeure

The coal miner said today it plans to assert a force majeure defense against Ridley Terminals Inc. that would allow it to skirt an otherwise obligatory payment set forth in a logistics contract with the coal transportation company. It has an agreement with Ridley requiring a minimum yearly throughput in British Columbia of 4 million metric tons of coal.

Walter’s maximum cost for not using the terminal is C$25 million ($23.4 million). The force majeure defense is based on “certain geological conditions” affecting the idled Wolverine mine, according to the filing.

A spokeswoman for Ridley declined to comment.

Maple Leaf Loading Ltd., which transported Walter’s metallurgical coal from the now-idled Brule Mine to its processing plant, has been placed into receivership by its creditors, Walter said in the filing. As a result, Walter is looking for an alternative transporter.

Moody’s assigned a B3 rating to the new notes today, while reducing Walter’s corporate family rating to Caa2 from Caa1.

Before lenders agreed on July 7 to grant a temporary reprieve of the loan’s leverage test, Walter was unable to borrow more than $94.1 million on its $313.8 million of revolving credit lines, according to a May 6 regulatory filing.

The company expects to retain access to short-term capital through a new $62.1 million portion of the revolving loan that it expects lenders to agree to today, according to the filing.

The company’s $450 million 8.5 percent notes due in April 2021, which are junior to the new notes, traded today at 56.5 cents on the dollar to yield 20.7 percent, compared with 59 cents on July 3, Trace data show.

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