LPC: Mining loans post stellar gains in US secondary market

By Lisa Lee

NEW YORK, Nov 18 (Reuters) - Mining companies have been some of the best performing credits in the US secondary loan market this year as commodity prices recover and the outlook improves for the coal industry as president-elect Donald Trump promises a spending spree to upgrade the country's infrastructure.

Arch Coal is the biggest gainer in the US secondary market overall for 2016 so far, according to Thomson Reuters LPC data, with a 70.3 point rise from lows earlier this year of 28% of face value to 98.5%. The company emerged from Chapter 11 bankruptcy protection in October after reducing its debt.

Fairmount Santrol is the third-biggest US gainer this year, and shows the second-biggest gains in the mining sector of 51.5 points, rising from 44 to 95.5.

Loans for mining companies have been trading way below other sectors this year, along with the troubled oil and gas sector, but have rallied sharply since mid-year with a steeper improvement since October.

Both sectors started the year at distressed levels, with average bids of 77 for mining companies and 79 for oil and gas companies, but are now trading at near-par or face value.

With average bids of 94.3 for mining companies on November 17, the sector is showing a gain of more than 18 points from a multi-year nadir of 75.79 on January 6. Oil and gas loans are showing a similar gain of more than 16 points, to 91.68 on November 17 from 75.24 on January 25.

Average bids in the 100 most widely-held loans of 98.63 on November 17 added only 2 points during the same time.

PRICE RALLY

The mining sector is enjoying the benefits of a sharp rally in commodity prices. Iron ore prices of US$72.42 on November 15 are up 89% from a record low of US$38.30 on December 11, due to increased Chinese steel production and speculation, according to data from Metal Bulletin.

Coal prices have been boosted by robust Chinese demand and volatile weather that increased electricity consumption and metallurgical coal prices have nearly quadrupled to US$310 a tonne.

Moody's revised the outlook for the North American coal industry to stable on improving fundamental conditions on November 15.

"Although we do not view the recent price uptick in met coal as ultimately sustainable, we also are not expecting prices to return to the low levels seen in late 2015 and early 2016 - which were themselves a function of an oversupplied market and miners still working through production rationalizations," says Anna Zubets-Anderson, a Moody's vice president-senior analyst.

The rally in commodity prices, which was fuelled by the Chinese government's stimulus package to recharge the nation's economy, caught many by surprise, but proved helpful for Arch Coal's restructuring deal.

Arch Coal's term loan climbed to 84.5-85.5 in October from 28 after filing for Chapter 11 in February, giving a recovery of more than 100% based on a higher market capitalization. Senior lenders now own 94% of the equity and US$326m in a new term loan.

"Loan investors would never have gotten the valuation they did if the Arch Coal restructuring agreement had happened later," said a loan investor.

Coal companies could benefit further from the presidency of Donald Trump, who repeated his support for the coal sector during his candidacy.

Coal miner Murray Energy's term loan gained 1 point to 90-92 and coal producer Westmoreland Coal's term loan traded 50bp higher to 82.75 bid immediately after Trump's victory on November 9, and have climbed further since.

Rebounding secondary prices helped Murray Energy to re-open the sector to capital markets issue in early November, when it priced a new US$175m term loan at 775bp over Libor with a 1% floor. An Original Issue Discount was widened to 88.5 from 92-93 to attract sufficient investors but the deal's placement shows improving sentiment for the sector, sources said.

Coal miner Bowie Resource Partners had to pull a proposed US$650m term loan in February that funded the purchase of mining assets from coal miner Peabody Energy amid a sustained slump in coal prices. The sale collapsed and Peabody filed for bankruptcy protection in April.

Many mining companies have curtailed capacity and cut costs severely which means that higher commodity prices are going straight to the bottom line, Monica Bonar, senior director of US Corporates at Fitch Ratings said.

"That's all profit at this point," said Bonar, regarding the impact of rising commodity prices.

Although loan investors are worried about the sustainability of prices at these levels as speculation may have contributed to the rise, they are appeased by the smaller debt burden at mining companies and their ability to weather another downturn.

Iron ore producer Fortescue Metals Group, the world's fourth largest iron ore producer, has paid down US$1.2bn of its term loan since June, in addition to generating strong free-cash-flow to cover increased dividends and improving production costs in the first half of the year, according to research firm Creditsights.

The company's term loan B has risen 34 points to trade near par at 99.88 from 65.67 earlier this year as hope grows of a cyclical upturn.

(Reporting by Lisa Lee; Editing By Tessa Walsh)