Alpha Natural Resources (ANRZQ) is the nation’s third largest coal producer and the leading producer of metallurgical coal, with a large reserve base in Appalachia. It also has a meaningful presence in the Powder River Basin in Wyoming.
The company’s annual EBITDA peaked at just over $950 million in 2012, but then plunged to only $76 million in 2013 and then to a negative $91 million in 2015. Meanwhile its total debt outstanding increased from $3.4 billion in 2012 to $4.3 billion in 2015. Unable to generate cash to service that debt load, the company filed for bankruptcy in August 2015.
In its bankruptcy plan, the company has proposed to transfer six of its largest and most profitable mining complexes, with a total of 15 active mines, to a newly-formed company (Newco), in a Section 363 sale. By doing so, Alpha and its senior secured creditors, hope to create a profitable company that will be mostly unburdened by certain legacy costs. Newco should therefore be a good candidate to return to the public markets.
Alpha’s remaining assets—27 mining complexes with 29 active mines and perhaps 15 or more inactive mines—as well as its legacy (and non-cancellable) liabilities will stay with the debtor. That “Reorganized ANR” may come public again, but it might also remain unlisted. Conceivably, Reorganized ANR could sell off its assets piecemeal over time, probably to smaller investor groups, or it may even attract a bid from a private equity firm
Alpha’s common stock, which now trades on the “pink sheets,” traded most recently at $0.0156, down from a post-financial crisis peak of $68.05 in January 2011. Its unsecured bonds have been similarly decimated, trading below 1% of par or for $10 per $1,000 of face value. The public markets have therefore been ascribing little, if any, value to Alpha’s publicly-traded securities.
The proposed bankruptcy plan confirms that view for Alpha’s equity investors, but recoveries for bondholders are still somewhat up in the air. Under the plan, equity holders would get wiped out. Barring a sudden and dramatic turnaround in Alpha’s business by June 27, the court deadline for voting on the plan, equity investors will get zero.
Bondholders, on the other hand, are being offered, among other things, 5% of the equity of Newco, warrants for 7.5% of Newco (at an exercise price that ensures that secured creditors get all of their money back first) and all of the equity of Reorganized ANR (subject to several important caveats).
This is a complex plan that is difficult to evaluate. The Disclosure Statement estimates recovery values—for example, it says that the above package for bondholders represents a recovery of “approximately 1% to 3.5%” of their claims—but it offers no detail on how it reached that conclusion.
The Disclosure Statement also notes that the various components of the distributions to creditors are inherently difficult to value. Yet, it does not provide necessary details about the terms of certain securities being offered to creditors. Neither does it describe certain key assumptions in the projected financial statements for Newco and Reorganized ANR.
As an analyst, this data is necessary to make a reasonably informed assessment of the value of the consideration being offered to creditors. If the consideration is difficult to value, creditors should have sufficient information so that they can form their own assessments of the bankruptcy plan’s proposed recoveries, if they choose to do so.
For example, the financial projections for both Newco and Reorganized ANR are rudimentary. The Disclosure Statement does not provide details on certain key assumptions such as future tons sold and average sales prices. Nor does it provide a current estimate of Alpha’s coal reserves and how those reserves will be split between Newco and Reorganized ANR. (Analysts may be able to guess at the reserves split by using the data provided in the accompanying liquidation analysis, which provides estimated “fire sale” dollar values of reserves by mine, but not estimated tons.)
The committee of unsecured creditors probably did obtain sufficient details to evaluate the bankruptcy plan and the consideration being offered. (The committee has endorsed the bankruptcy plan.)
Actual holders of unsecured claims can probably get access to certain key exhibits of the bankruptcy plan (detailing the terms of the proposed new securities of Newco and Reorganized ANR), that were omitted in the documents filed with the court, by calling Alpha’s bankruptcy counsel or financial advisors.
Yet, even if I accept the disclosure statement at face value, I believe that bankruptcy plan does not structure recoveries in a way that is fair to Alpha’s unsecured creditors. For example, the Newco warrants may give the unsecureds an additional 7.5% stake, but the strike price on the warrants will be set to ensure that secured creditors get all of their money back with interest before the warrants have any intrinsic value. That is all well and good; but why then are the warrants for only a 7.5% stake?
In theory, when the secured creditors are paid in full, the unsecured creditors are entitled to all of the remaining value, up to the face amount of their claims. Why shouldn’t the unsecured creditors get warrants for 99% of Newco under those terms? By giving the unsecureds only a 7.5% stake, the secured lenders could conceivably recover more than their claims and accrued interest, which is more than they are entitled to under the law.
There are a couple of reasons for this: The secured creditors want their securities to have additional upside potential so it will be easier for them to cash out. A 99% warrant stake would also be a significant overhang on Newco’s common stock.
Even so, there is room somewhere between 7.5% and 99% for Alpha to give bondholders who rode the bonds down from par a greater chance at a more meaningful recovery.
Despite my reservations about the Bankruptcy Plan, if I accept the Disclosure Statement’s estimated recovery of approximately 1% to 3.5%, then the bonds have significant upside potential from current levels below 1%.
Security holders of record as of May 18, 2016 are entitled to vote. The voting deadline on the plan is June 29 and a hearing will be held to confirm the plan on July 7.
June 12, 2016
Stephen P. Percoco
Lark Research, Inc.
839 Dewitt Street
Linden, New Jersey 07036
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