Correction: This story has been updated to correct information regarding Southeastern Asset Management's stake in Consol Energy.
NEW YORK (The Deal) -- Unless out-of-court restructurings for Arch Coal (ACI) and possibly Peabody Energy (BTU) gain traction, they could be the next two coal producers to file for bankruptcy protection as final regulatory rules requiring the reduction of carbon emissions by 32% from 2005 levels could finish the demolition job started by depressed prices and sluggish demand.
On Monday, the Environmental Protection Agency unveiled the final version of the Clean Power Plan and, perhaps not coincidentally, the largest U.S. coal producer, Alpha Natural Resources (ANRZ), filed for Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Virginia in Richmond, leaving industry watchers wondering if that was the last domino to fall, or if there will be more filings to come.
The coal industry has already been strafed by bankruptcy filings this year, including Walter Energy (WLTGQ) (July 15), JW Resources (June 30), Patriot Coal's second bankruptcy filing (May 12), and Xinergy (April 6).
In addition, Berau Capital Resources submitted a Chapter 15 petition on July 10, and Glencore (GLEN) said Tuesday that it plans to restructure its majority-owned subsidiary Optimum Coal Holdings under South Africa's Business Rescue framework, which is similar to Chapter 11.
Some analysts believe the impact of the Clean Power Plan on coal companies could be widespread.
"The impact on the U.S. coal industry will be severe if the rule is ultimately enforced," BB&T Capital Markets analysts said in a report released Monday, just before the final plan was released. Those analysts said that if the U.S. works to reduce its carbon emissions of that magnitude, "We think higher-cost [coal] producers, especially those with leverage, would be wiped out."
St. Louis-based Arch Coal is already trying to restructure its debt out-of-court with an exchange offer that would swap unsecured debt for new secured debt with a lower principal amount. The offer is set to expire at midnight on Tuesday.
Meanwhile, CreditSights analyst Charles Johnston said by phone Tuesday that he believes that Peabody's executives are probably contemplating a debt exchange offer similar to the one Arch Coal is pursuing, in order to get ahead of debt maturities before the situation becomes critical.
"It makes sense to be proactive," he said, explaining that he thinks Peabody, which is also based in St. Louis, would use its first-lien and second-lien issuance capacity, hopefully to address near-term maturities but also potentially to take care of some of its more expensive debt.
Johnston said that, in Arch Coal's case, the distressed exchange would help by reducing the principal amount of debt and also the company's interest expense, and taking out a revolving credit facility with restrictive covenants that could pose compliance problems.
"Still, I don't know if that would be enough to keep them out of bankruptcy," he said.