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Peabody Securities Finance Corporation -- Moody's upgrades Peabody Energy Corporation's CFR to B3

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Rating Action: Moody's upgrades Peabody Energy Corporation's CFR to B3Global Credit Research - 10 Dec 2021New York, December 10, 2021 -- Moody's Investors Service ("Moody's") upgraded all ratings for Peabody Energy Corporation ("Peabody"), including the company's Corporate Family Rating ("CFR") to B3 from Caa1 and Speculative Grade Liquidity Rating ("SGL") to SGL-2 from SGL-3. The rating outlook is stable."Peabody reduced debt by more than 15% in 2021 and strong expected free cash flow generation over the next few quarters should facilitate further debt reduction," said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for Peabody Energy Corporation.Upgrades:..Issuer: PIC AU Holdings Corporation....Senior Secured Bank Credit Facility, Upgraded to B2 (LGD3) from B3 (LGD3)....Senior Secured Regular Bond/Debenture, Upgraded to B2 (LGD3) from B3 (LGD3)..Issuer: Peabody Energy Corporation.... Corporate Family Rating, Upgraded to B3 from Caa1.... Probability of Default Rating, Upgraded to B3-PD from Caa1-PD.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3.... Senior Secured Bank Credit Facility, Upgraded to B3 (LGD4) from Caa1 (LGD3).... Senior Secured Regular Bond/Debenture, Upgraded to B3 (LGD4) from Caa1 (LGD3)..Issuer: Peabody Securities Finance Corporation....Senior Secured Regular Bond/Debenture due 2025, Upgraded to B3 (LGD4) from Caa1 (LGD3)....Senior Secured Regular Bond/Debenture due 2022, Upgraded to Caa2 (LGD6) from Caa3 (LGD5)Outlook Actions:..Issuer: Peabody Energy Corporation....Outlook, Remains Stable..Issuer: Peabody Securities Finance Corporation....Outlook, Remains Stable..Issuer: PIC AU Holdings Corporation....Outlook, Remains StableRATINGS RATIONALEThe rating upgrade reflects: (i) substantially improved near-term operating environment driven by meaningful higher coal prices; (ii) improved liquidity and debt reduction in 2021; and (iii) expected free cash flow and ability to reduce debt further in 2022. Moody's expects that coal prices will translate into strong earnings and cash flow generation in the second half of 2021 and 2022. While pricing will eventually normalize toward levels more consistent with Moody's medium-term sensitivity range for thermal coal ($60-90/metric ton Newcastle), the current period of strength will enable Peabody to generate sufficient cash to reduce debt meaningfully. Taken together, Moody's forecast anticipates that a combination of cash and internally generated cash flow places the company on a trajectory to achieve a very low net debt position in 2022.Peabody's credit profile is constrained by the existence of substantial debt and non-debt liabilities in an industry facing access to capital challenges driven by substantial ESG-related risks. Peabody reported about $1.5 billion of debt at 30 December 2020 and about $1.3 billion at 30 September 2021. The company also reported about $1.3 billion of surety bonds, supporting asset retirement obligations of about $700 million, and additional non-debt liabilities. Moody's stabilized the company's rating outlook on 14 January 2021 when a multi-party agreement stabilized the surety program and substantially reduced the risks associated with collateral calls. The quantum of debt reduction is meaningful compared to balance sheet debt and supports today's upgrade of the ratings. However, it remains modest compared to nearly $3 billion of debt and non-debt liabilities and, therefore, Peabody's credit profile remains substantially constrained given the cyclical and secular risks associated with the global coal industry.The B3 CFR balances an asset base capable of supporting higher ratings with a balance sheet that contains significant debt and debt-like liabilities, which created significant financial difficulty in 2020. Peabody has a diverse platform of thermal and metallurgical coal mines in Australia and the United States. Most of the company's US thermal coal is sold to domestic utilities and all the US-produced metallurgical coal is sold into the seaborne market. Most of the company's coal produced in Australia is sold into the seaborne thermal and metallurgical coal markets in Asia. Like other rated coal producers, environmental and social factors have a material impact on the company's credit quality by increasing the cost of capital. The rating also takes into consideration that some mining assets have less favorable operating prospects in the coming years and, therefore, could be subject to more significant reclamation-related spending over the rating horizon.The SGL-2 Speculative Grade Liquidity Rating reflects good liquidity to support operations over the next 12-18 months. Moody's expects positive free cash flow generation over this horizon with most of the cash applied toward debt reduction. The company also reported $587 million of cash on 30 September 2021. The level of cash on the balance sheet is emphasized in our analysis because the company does not maintain a traditional revolving credit facility, which was eliminated through a debt restructuring transaction in January 2021. Peabody has a $324 million letter of credit facility (cannot make cash borrowings) and a $250 million accounts receivable securitization facility. These facilities are used primarily to support letters of credit and the letter of credit facility contains a minimum liquidity provision that essentially requires the company to carry more cash on its balance sheet.Environmental, social, and governance factors are important factors influencing Peabody's credit quality. The company is exposed to ESG issues typical for a company in the coal mining industry, including increasing global demand for renewable energy that is detrimental to demand for thermal coal, especially in the United States and Western Europe. Exposure to carbon transition risk and environmental reclamation obligations are the most significant environmental exposures. Social issues include factors such as community relations, operational track record, and health and safety issues associated with coal mining such as black lung disease. Specific social issues with respect to Peabody include the future operational status of the company's North Goonyella metallurgical coal mine that is not operational following a mine fire. Governance-related risks incorporate legacy issues (including $1.6 billion of cash returned to shareholders from 2017-2019) that culminated in a situation where existing financial arrangements became unsustainable during an industry downturn. Recent management changes, including the company's CFO in 2020 and CEO in 2021, have occurred and the company has articulated more conservative financial policies, including some evident debt reduction in 2021.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook assumes that the company will generate positive free cash flow, repay debt, and maintain good liquidity to support operations. Moody's could upgrade the rating with expectations for continued strong operating performance and positive free cash flow, meaningful and sustained reduction in balance sheet debt below $750 million, and consistent messaging around maintaining a modest amount of net debt on an ongoing basis. Moody's could downgrade the rating with expectations for meaningful cash burn, erosion in liquidity, or a significant adverse operating event at a key mine.Peabody Energy Corporation is a leading global pure-play coal producer with coal mining operations in the US and Australia and about 4 billion tons of proven and probable reserves. The company generated $2.9 billion in revenues in 2020.The principal methodology used in these ratings was Mining published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1292752. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Benjamin Nelson VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Glenn B. Eckert Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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