Pure metallurgical coal play, Walter Energy Inc. (WLT) announced that it will offer 9.875% senior notes worth $500 million due 2020, to recompense outstanding amounts under its credit facilities, for fees and expenses and for general corporate purposes. The interest is payable on the 15th of June and December, respectively, for each year with the first one being rewarded on June 15, 2013.
The offering of notes is expected to be completely guaranteed by Walter Energy and its key business wings. At the end of third quarter 2012, Walter Energy’s debt-to-equity ratio stood at 199.8%, up significantly from 106.2% at year-end 2011. Moreover, with the issuance of notes, Walter Energy’s debt-to-equity ratio will further increase to 243.7%.
The company has sparingly resorted to issuance of notes. However, its high-cost asset purchases, especially of the Canadian mines, have led to debt escalation. The $3.3 billion acquisition of Western Coal Corporation and the current proposed offering would continue to keep the company under debt pressure.
The company’s long-term debt level as of September 30, 2012, was $2.3 billion, unchanged from the year-end 2011 number. Interest expenses of the company in the third quarter 2012 were $30.5 million which could increase in the upcoming quarters with the currently proposed issuance.
Standard & Poor and Moody’s provided B+ and B3 ratings, respectively, implying uncertainty as to the company’s capability in meeting its financial commitments. Meanwhile the current softness in the global steel market will likely result in tepid demand for met coal.
The Zacks Consensus Estimates for the fourth quarter and full year 2012 are currently pegged at a loss of 60 cents and earnings of 97 cents per share, respectively. However, we presently prefer Consol Energy Inc. (CNX), currently having a Zacks #3 Rank (Hold rating). Consol Energy has a stable outlook owing to its low-cost coal operations and firm focus on expansion of its natural gas business.
We apprehend that the depressed U.S. economy will limit the growth opportunities at Walter Energy. The bearishness is reflected in the Zacks #5 Rank (Strong Sell rating) that the stock holds over the short term. Based in Birmingham, Alabama, the company is engaged in the production and sale of steam and metallurgical coal from surface and underground mines located in the United States.
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