FELP - Foresight Energy

[Picasso]

Picasso,

A simple clarification.  Do we know what the bond holders and FELP are currently negotiating over?  Are there rumor mills, NY Post etc articles about sticking points in negotiation etc?  You're suggesting that Cline comes in and pays cash for new equity/2nd lien debt?  I'm assuming that's what you're talking about all along.  Do we need to worry about the company being in default after the bonds are taken care of.  Put another way, does the current level of performance triggers defaults in more senior portion of the debt structure?  How do you envision that being taken care of?

Thanks

The bondholders want $101.  Bonds are currently trading flat. 

This article from Bloomberg is the only thing I found that gave some insights into the negotiations.  http://www.bloomberg.com/news/articles/2016-03-14/two-coal-barons-one-overdue-bond-payment-and-the-end-of-an-era

Matters have reached a point of such urgency that Murray is pushing Cline to chip in his own money, the people said. He wants the Foresight founder to either lend to the company or inject equity to help pay down some or all of Foresight’s 7.875 percent bonds maturing August 2021, said the people.
Another option is for Cline to fund a repayment of some of Murray Energy’s $3.4 billion of debt, said the people.
“I have not been involved in any negotiations respecting any aspect of Murray Energy’s capital structure and am not in a position to comment on that at all,” Cline said in the e-mail. “Foresight’s capital structure was and remains stand alone.”​

Last year they generated what I would consider a comfortable cushion above the leverage and interest coverage ratios.

Our covenants required a consolidated interest coverage ratio of greater than 2.00x and a consolidated net senior secured leverage ratio of less than 2.75x as of December 31, 2015. As of December 31, 2015, our consolidated interest coverage ratio and consolidated net senior secured leverage ratio were 3.00x and 2.50x, respectively.

Once Foresight takes care of this change of control mess, there aren't any default issues that worry me.  There is still the "going concern" issue with the 10-K, but that's due to the possibility that bondholders can accelerate repayment and they only have $20 million or so on hand.  It has very little to do with the actual operations.

I think you'll see some equity injected primarily to reduce the leverage a little and get the senior lenders comfortable with any amendments.  The company can then reduce debt fairly quickly with cash generation from operating results.  Everything comes down to settling with the noteholders.

[indirect]

There is a binary outcome to the negotiations with the bondholders. One way to play it is 3/4 of the position to Felp bonds and 1/4 in the equity. Either way you are buying into the lowest cost US coal producer in the country with minimum risk of loss of principal.   

[Picasso]

That is potentially a good trade but the bonds are 144A. If I was BlueMountain I would be buying up the equity here and settle but does that count as inside info?  Perhaps... Perhaps not...

[Green King]

That is potentially a good trade but the bonds are 144A. If I was BlueMountain I would be buying up the equity here and settle but does that count as inside info?  Perhaps... Perhaps not...

This is a interesting situation. How do you view the drop in illmois Basin coal spot price and its effect on cashflow ? Since opearting leverage works both ways.
https://www.quandl.com/data/EIA/COAL-US-Coal-Prices-by-Region

TIA

[Picasso]

That is potentially a good trade but the bonds are 144A. If I was BlueMountain I would be buying up the equity here and settle but does that count as inside info?  Perhaps... Perhaps not...

This is a interesting situation. How do you view the drop in illmois Basin coal spot price and its effect on cashflow ? Since opearting leverage works both ways.
https://www.quandl.com/data/EIA/COAL-US-Coal-Prices-by-Region

TIA

Current ILB coal pricing is where all their competitors are under water.  ILB coal pricing has been at these levels for half of 2015, yet they still generated substantial free cash flow and covered interest expense 3x.  I've tried to picture an environment (in the next few years) where ILB pricing sinks to a point where they're violating debt covenants.  It's really hard to get there unless their operating expenses suddenly increase by 50%. 

Here is an older WSJ article that describes the Foresight advantage pre-IPO:

http://www.wsj.com/articles/foresight-energy-bets-that-theres-gold-in-coal-1403042566

Demand for Illinois Basin coal generally is expected to increase to 185 million tons in 2020 from 102 million tons last year, according to consulting firm Wood Mackenzie. The firm expects that by 2025 all coal-fired utilities will have scrubbers.

"Somebody's going to survive, and it's going to be the low-cost producers," says Wood Mackenzie analyst Matt Preston. "There's no reason to expect they're not going to be profitable for at least the next four or five years."

Foresight, whose workforce isn't unionized, controls three of the four most productive coal mines in the U.S. The company said in its filing that it sells a significant portion of its coal under long-term deals. Foresight already has sold 85% of its production for this year and 64% for next.

The company also is looking to increase exports. Foresight, one of the largest U.S. exporters of thermal coal, has exported roughly 36% of its output since 2008. The company opened a barge terminal in southern Indiana on the Ohio River to move coal to New Orleans and from there, to Europe, South America, Africa and Asia. Foresight is the biggest supplier to England's largest power plant.

I think that backdrop leaves them fairly well positioned.  They've sold 22 million tons in 2014 and 22 million tons in 2015.  Before they dropped guidance, they also seemed confident about getting close to 21 million tons in 2016.  Given they have capacity for over 30 million tons (existing capex is already built into the 30 million tons of capacity) I don't think the actual business operations is going to hurt the financial results even with the Deer Run mine fire.  But if they have to sell some assets in bankruptcy and Deer Run has no buyers/keep burning then I think costs start moving up quickly and current ILB pricing can kill any profitability.  It's part of the reason why I think the bondholders don't want to take this into bankruptcy as a loan to own.  What are they going to sell to repay the $300 million term loan without killing the rest of the company?

Most of my research indicated full cycle ILB pricing in the $40's.  There's some pressure at the moment from low nat gas and zombie coal players ignoring depreciation to keep mining for cash flow but that doesn't mean utilities will suddenly abandon coal on their roughly 250 scrubbed plants.  If a full cycle price is in the $40's then I'm not too worried about pricing in the $20's that will persist long enough to hurt FELP earnings and trip covenants.  It's possible but not very likely.

I should also note that Murray has been purchasing Columbian mines to blend with ILB coal and sell into the export markets.  They have below market contracts with the export terminal in Louisiana (that Cline used to own before selling to SunCoke Partners in exchange for cash, seller financing, and SXCP units) so if that ends up successful then the short-term ILB pricing is less of a worry.  That said, the export terminal is an option on the ability for Foresight and Murray to sell outside the domestic markets.  I just thought I would mention it in case people thought this was only a domestic coal play.  Murray and Cline are fairly savvy about looking ahead several years.  Too bad they didn't hire better lawyers at the time of the FELP change of control.

There are also some various supply cost curves out there.  This presentation from Foresight in late 2014 has a slide with various mine cash costs (slide 7).  I don't think you need to make a bet on the commodity price here, you just have to assume pricing will average "something" over the industry supply curve.  The difference in a "little something" and "a lot something" is the difference between a 5 bagger and a 10+ bagger assuming minimal dilution.  I'm certainly not trying to make a bet that coal goes up but even if pricing stays here they shouldn't be violating any covenants. 

https://coaltrade.org/wp-content/uploads/2015/09/Mike_Moran_Foresight.pdf

[Picasso]

And just a couple more thoughts to expand on BG's question.

It's entirely possible that nat gas goes to some insanely low price in 2016, 2017 etc.  There's been a bounce in the energy markets lately but these things tend to move in big waves and if energy rolls over again, it may end up being more devastating than what we've already seen.  That's not exactly the time I would want to be selling coal assets in a bankruptcy.  Maybe you can get ARLP to buy something, but their stock has already been crushed and these partnerships have a very high cost of capital at the moment.  You're not going to create accretive acquisitions at ARLP by selling equity or debt today unless you buy up FELP assets at prices that hurt the bondholders. 

The value in FELP is in keeping the current cost and capital structure, or at least something similar.  So when someone asks me "why is it taking so long to negotiate," Chris Cline must figure something along these lines as well.  The bondholders aren't going to make a killing unless they want to suddenly be strategic owners of a coal business long term and recreate an LP out of bankruptcy with half as many assets.  Even then it's debatable how much they might make.  For that reason I think Cline/Foresight doesn't want to give "par plus" on a settlement but something less.  But the bondholders know they can refinance at "par plus" (Cline is sitting on enough cash), so why take less?  It's quite the game of chicken.

[Green King]

Thank you for the answers.

[enoch01]

Thanks for the idea Picasso.  Nice game of chicken they have going on here.

[Picasso]

Part of what I think explains the current price is this hedge fund Accipiter Capital.  I attached their holdings.

Here's a little bio:

Accipiter Capital Management, LLC is an employee owned hedge fund sponsor. The firm primarily provides its services to pooled investment vehicles. It invests in public equity markets of the United States. The firm primarily makes its investments in equity securities in the life science, biotechnology, pharmaceuticals, medical device, healthcare providers, managed care, and health care service sectors. It employs fundamental analysis to make its portfolio. The firm obtains external research to complement its in-house research. Accipiter Capital Management, LLC was founded in 2002 and is based in New York City

Now get this... They bought roughly 6.4% of all FELP shares outstanding last quarter.  They also bought $25 million worth of VRX in the $100's.  But more importantly, why the hell did they buy $50 million of FELP at $6?  It doesn't fit their circle of competence at all.  And FELP is the bulk of their equity portfolio.  The rest of their portfolio has been getting smoked so maybe they have some redemption pressures.

Assuming they're the fund selling here, there just isn't enough liquidity to get out.  Average volume is in the 100k share region, they need to unload 84x that.  So I think you have some interesting dynamics with a low float and seller that may want out of a badly timed purchase. 

Or it could be Fidelity and Accipiter is just riding out that mistake.

[Picasso]

Actually it looks like Accipiter was buying as recently as Dec 31st @ $2.89.  I'm looking through all the Fidelity funds with FELP as a holding and they've been selling since the start of the year.  i.e., Fidelity Equity-Income Fund (FEQIX).  It's still a very unusual holding for Accipiter.