Banks Are Still Backing Coal

Alpha Natural Resources (NYSE: ANR  ) has bled red ink in eight of the last 10 quarters as it struggles through the coal industry's downturn. A revision of a key bank credit facility, however, shows that its lenders haven't given up on the company or the coal industry. And this is just one of several recent capital market transactions that show coal is getting the financial support it needs to survive.

Isn't it relaxing?
At a little over 40% of the capital structure, long-term debt wouldn't normally be considered a big overhang. However, in Alpha's case, it has lost money for seven consecutive quarters with the likelihood of more to come. That makes debt a much bigger issue.

The company's banking partners, though, have come to the table twice to rework its main credit facility. Increasing the facility in May and relaxing its covenants just a few days ago. The new change "eliminates the interest coverage ratio through the end of 2014." That gives Alpha plenty of breathing room as supply and demand balance out in the global thermal and metallurgical markets it serves. The covenants will slowly return to more normal levels by 2016 or so.

Not the only one
Alpha isn't the only company that's been helped out by its bankers. For example, Walter Energy (NYSE: WLT  ) amended its credit facility in July, assuring that it remained on the right side of its debt covenants. Debt at Walter, however, is a more onerous 75% of the capital structure after what proved to be an overpriced merger. That's part of the reason why a dividend cut accompanied the credit facility update.

Walter has also tapped the debt markets to help shore up its financial position, issuing bonds due in 2019 to pay off a term loan. Alpha, for its part, tapped the capital markets by issuing some convertible debt to raise cash. Natural Resource Partners (NYSE: NRP  ) has also issued bonds, though in this case it was to permanently finance the acquisition of a soda ash miner. That move actually diversified the company further away from its reliance on coal royalties, but increased debt to around 80% of the partnership's capital structure.

Capital markets
That fact that coal companies, even those with high levels of leverage, have been able to work with banks and issue debt is a good sign. It means that they are getting the support they need in a tough market and that bankers believe these companies will, in the end, be strong enough to pay their debts.

In fact, some coal miners have even tapped the stock market. Rhino Resource Partners (NYSE: RNO  ) issued units in September to "repay borrowings outstanding under [a] revolving credit facility." That's common practice for partnerships, which often use credit facilities to fund expansion efforts. Natural Resource Partners basically did the same thing, issuing debt instead of units to pay off its credit facility. Rhino shareholders might have been better off had the partnership issued debt based on the currently high yield of its units, but it's still telling, in a good way, that Rhino was able to issue the units at all.

Don't count them out
Coal is clearly out of favor and needs a helping hand right now. Banks appear to be doing just that, and that will help the industry get to the other side of this downturn. In fact, even service providers like railroads are getting in on the act, with CSX (NYSE: CSX  ) reducing its prices to help support U.S. coal miners in the export market. Although that's a near-term hit for CSX, it helps maintain key customer relationships until the clouds clear. The same is true for the banks.

While it's easy to look at many of the above actions in a negative light, collectively they show the support being provided to U.S. coal. That should allow the industry, though maybe not every participant, enough breathing room to thrive again, or at least survive.  

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