Coal Producer Restricts Valuable Collateral

The proposed $525 million senior secured credit facility for coal producer Massey Energy is secured by high-quality accounts receivables and inventories, which should realize substantial recovery under a liquidation scenario. However, in the event of a default or bankruptcy, the secured debt holders are unlikely to receive full compensation. As a result, Standard & Poor's has assigned the credit a rating of BBB-.

"Strategic assets including land, coal reserves and mining permits, which are among the most valuable assets, are not among the collateral," said S&P analyst Thomas Watters. The secured debt holders are likely to recover a substantial amount of principal--at least 80%, assuming a fully drawn bank facility, he noted. But the other collateral securing the bank debt is likely to incur substantial devaluation in a default scenario, he added.

The proposed bank deal comprises a three-year, $250 million revolver and a $275 million "B" term loan, which amortizes quarterly at 1% per year for the first three years. The new facility refinances $400 million in existing credit lines, which consist of a $150 million 364-day revolver maturing next month and a three-year, $250 million line maturing in November 2003. Phil Nichols, assistant treasurer at Massey, said the Richmond, Va., coal producer is in discussions with potential lenders to replace the existing lines. If the company is unable to refinance the existing facilities, the 364-day line does have a one-year term-out option.

One analyst looking at the credit said, in the near-term, there are fears of a weakening economy but, in the longer-term, there are some positive fundamentals. Importantly, there is increasingly limited access to good coal grades, which should push up prices.