Peabody Sells and Buys Notes - Analyst Blog

Yesterday, coal miner Peabody Energy Corp. (BTU)  initiated a new issue of senior notes and also announced the redemption of notes previously issued.

In the new offer, Peabody priced the issue of 6.5% senior notes due 2020, aggregating to $650 million, under its shelf registration statement. Further, it announced the redemption of its outstanding 6 7/8% senior notes due 2013.

The 6.5% notes issued by Peabody will be a general unsecured senior obligation and will rank equally in right of payment with the company's other senior creditors. Peabody intends to use the net proceeds from this offering to fund the cash tender offer for any and all of its outstanding 6 7/8% senior notes due 2013. The underwriters expect to deliver the notes on or about August 25, 2010.

In the other offer, Peabody intends to redeem for cash all of its outstanding 6 7/8% senior notes due 2013 on September 10, 2010 to the extent that such notes are not tendered in connection with the previously announced offer to purchase, dated August 11, 2010. All notes not tendered and accepted for purchase in the tender offer will be redeemed on September 10, 2010. The redemption of the notes will not change or amend, which is otherwise set to expire at 12:00 midnight, New York City time, on September 8, 2010.

On and after September 10, 2010, the notes will no longer be deemed outstanding, interest will cease to accrue thereon, and all rights of the holders will cease, except for the right to receive the redemption price, without interest thereon.

In compliance with the terms governing the notes, the redemption price is equal to 101.146% of the aggregate principal amount of the notes, plus accrued and unpaid interest, if any, up to September 10, 2010. The aggregate principal amount outstanding of the notes is $650 million.

The offer is conditioned on receipt of the net proceeds from Peabody's 6.5% senior notes offering and the general conditions set forth in the offer to purchase.

Peabody has a long operating history of impressive safety and reliability. The company also has very notable cash generating abilities. As of June 30, 2010, Peabody had total available liquidity of $2.4 billion, consisting of cash on hand, its revolving credit facility and accounts receivable securitization program. The company had $1.2 billion in cash and $2.7 billion in long-term debt. Operating cash flows as of the same period were $292.4 million.

We expect Peabody’s strong balance sheet to enable it to explore high-growth investment opportunities, particularly at a time when valuations are depressed. However, uncertainty surrounding the depth and span of the current global downturn persists. Although recent rhetoric may suggest a bottoming or stabilization of markets, definitive signs of recovery have yet to be seen.

Consequently, we remain on the sidelines, retaining the Zacks #3 Rank ('hold') for the stock, supported by our Neutral Recommendation.