Walter Energy Inc. is preparing to file for bankruptcy protection this week after agreeing on a fast-track restructuring process that would hand ownership of the coal miner to senior creditors, according to people familiar with the matter.
The company, which has been battered by a sharp drop in coal prices, plans to swap its senior creditors’ debt for ownership of the company in a chapter 11 restructuring that would largely wipe out junior creditors and reduce labor and pension costs, the people said.
On Tuesday afternoon, Walter and a group of senior bond and loan holders were finalizing an agreement that would allow the company to use cash pledged as collateral to fund its operations in bankruptcy, the people added. Walter had $434.7 million in cash as of March 31, according to a regulatory filing.
The details of such plans can change at the last minute as companies and investors finalize agreements. Walter may face opposition from junior creditors, labor interests and other stakeholders seeking to protect their interests as it restructures.
Walter in May warned that it might consider a chapter 11 bankruptcy filing if it couldn’t restructure its $3 billion debt load out of court. It skipped a bond interest payment last month, entering a 30-day default grace period that expires Wednesday.
A collapse in coal prices has Birmingham, Ala.-based Walter and its rivals hemorrhaging cash and choking on debt taken on to finance acquisitions around the start of the decade. Demand for coal burned by power plants has suffered amid competition from abundant and relatively clean-burning natural gas. China’s slowing economy has helped drive the price of coal used in steelmaking down to an 11-year low.
Walter has posted annual losses every year since 2011, when it loaded up on debt to finance a $3.3 billion acquisition of Canada’s Western Coal Corp.
The deal was part of an ill-timed wave of coal-industry consolidation, fueled by optimism about China’s urbanization that drove a boom in metallurgical coal used in steelmaking. In 2011, demand got a temporary jolt from severe flooding in Australia’s Queensland state, which sidelined production there.
To encourage a quick trip through chapter 11, Walter has agreed on a series of milestones, such as a deadline for winning union concessions, according to people familiar with the plans. Failure to meet those requirements would trigger a court-supervised auction of Walter’s assets at which the senior creditors would lead the bidding, the people said.
Walter has enough cash to continue operating and won’t immediately seek a “debtor-in-possession” loan, which companies often use to operate in bankruptcy, some of the people said. The senior creditors may provide such financing if needed in the months to come, they added.
Coal miners’ woes are coming to a head after years of decline. In addition to low prices, the industry is also struggling with obligations tied to mine-cleanup regulation and anunderfunded multiemployer pension plan.
Patriot Coal Corp. filed for chapter 11 bankruptcy protection in May. Alpha Natural Resources Inc. and Arch Coal Inc. are working with bankers and lawyers who specialize in helping struggling companies restructure debt and deal with creditors, The Wall Street Journal has reported.