The ongoing restructuring saga at Indonesian coal producer Berau Coal hit a roadblock last week when a proposed swap of 2015 paper on which the company defaulted last year and on its due 2017s into new debt failed to get inked by creditors.
At a scheme of arrangement hearing in the Singapore courts, creditors pushed for an adjournment to next March, in a move that raised eyebrows among players who had watched the unfolding story since Berau defaulted on its due 2015s last July to the tune of US$450m.
The company has already bought back some of the two bond issues, reducing the outstanding on the 2015s to US$358m and on the 2017s to US$442m. The terms it had presented in Singapore’s high court last month proposed a steep haircut, of 82% of the principal on a chunk of the debt.
Some of it was to have been replaced with a 10-year 1% note and the rest to be taken out by a 15-year with a late-start amortisation. As of last Thursday this restructuring proposal has been put on ice and one can only speculate as to precisely what game the creditors are playing.
Admittedly, the terms proposed by Berau were bruising. An 18 cents on the dollar settlement would mirror that which shipping company Arpeni Pratana managed to impose on creditors in 2012 - but placing the proposed terms against a recent revival of coal prices suggests the plan was egregious.
Indeed, over the summer there was the ambiance of a wake hovering over the proceedings when the price of spot Newcastle coal, the industry benchmark, was at around the 50 mark and when the forward curve implied worse was to come.
MORE BEMUSING WAS the fact that even though the coal price was in the doldrums, Berau had managed to retire a chunk of debt in a reverse Dutch auction with a reserve price of 33 cents on the dollar – hardly something to dance an Irish jig about but certainly better than the latest offer at a time when coal has rallied around 100%.
Equally bemusing was the fact that the debt has been spotted in secondary at as high as 30 cents on the dollar.
Perhaps the markets know something about how the restructuring is likely to pan out, but the estimated price of the debt in the event of full liquidation is around 8-9 cents. Berau’s dollar creditors must be hoping that when the next hearing comes along in March, a more generous term sheet will be on the table.
Certainly if I were sitting on the steering committee or a holder of a large chunk of Berau paper, I would be hoping that the haircut can be reduced.
And that’s because the proposed 1% 10-year, plus the back-ended amortisation note are not only frankly insulting as a proposed settlement in harsh economic terms but because the paper offers investors long-term exposure to an industry that seems more than likely to become increasingly troubled as the years roll on.
Indeed, a previous proposal which would have linked the coupons on the residual notes to potential upside in the coal price, was rejected by creditors, presumably because they didn’t buy the rosy coal price scenario ensconced there. But it looks profoundly magnanimous by comparison with the slim pickings sketched out in the latest scheme of arrangement.
AFTER ITS SURPRISE rally, Newcastle coal spot is on the retreat, having fallen back below 100, with the futures curve suggesting a retracement to the 80s in the coming months. One wonders indeed just what the next proposal will be come March if the futures curve is right.
Of course, Berau’s 2015s and 2017s are a legacy of the glory days of the coal industry, when banks were bending over backwards to lend to miners and their ancillary service providers and investors couldn’t get enough of high-yield bonds from the industry.
But now, in the slipstream of the super-fast ratification of the COP21 climate change agreement last month at the COP22 in Marrakech, the coal industry’s days look numbered. This despite the contrarian stance from US president-elect Donald Trump who seems to believe that coal has a future.
Coal, of course, won’t disappear entirely - it is crucial in a number of manufacturing processes, most notably in steel production - but its price looks set for a long-term secular decline as the cost of renewable energy plummets. The issue in the long run will be whether producers such as Berau regard it is worth their while to continue to mine at the lower prices which seem likely to bedevil the industry.
If they don’t, then of course the prospect of redeeming long-dated paper recedes into nothing. With that scenario in mind, I’d been concentrating, if I were a creditor, on fighting for a less drastic haircut. And I’d be mindful that any further adjournments not only reduce further the present value of my investment in the company’s debt, but risk placing the entire enterprise into liquidation, something which would not serve my interests best at all.
