Hedge funds to reap big
stock gains from bankruptcy of coal miner Peabody
Send a link to a friend
[March 16, 2017]
By Tracy Rucinski and Tom Hals
Del (Reuters) - When leading U.S. coal miner Peabody Energy Corp
emerges from bankruptcy next month, a group of seven investment funds
could reap hundreds of millions of dollars in gains from an unusual sale
of discounted company stock.
Six hedge funds and a state investment fund together own about half of
the company's unsecured bonds, according to a January disclosure
statement from Peabody. They used that leverage to gain access to a
private placement of company stock, which has become surprisingly
valuable amid an unexpected coal resurgence.
The exclusive offering for institutional investors will be challenged in
bankruptcy hearings starting Thursday by a group of individual investors
who were shut out.
Those investors - who said in court filings that they own between 5 and
7 percent of the unsecured bonds - will argue in U.S. Bankruptcy Court
in St. Louis that Peabody's reorganization plan should be rejected
because it violates a bankruptcy statute requiring equal treatment for
owners of the same securities.
"This is absolutely theft from a small group of people who are
powerless," said Edward Hindelang, 69, a longtime investor in Peabody's
stock who started buying its bonds when clouds gathered over the coal
sector in 2015.
St. Louis-based Peabody declined to comment, but has argued in court
that its Chapter 11 restructuring plan maximizes value for all investors
and creditors. Extra benefits for major investors reflect their outsized
role in negotiating and financing the company's bankruptcy exit, the
company has said in court filings.
Two of the hedge funds - Elliott Management and Aurelius Capital
Management - played a pivotal role cutting the deal. Elliott and
Aurelius gained negotiating clout by threatening a protracted legal
challenge aimed at using an accounting change to strip $1 billion in
collateral from a loan arranged by Citibank.
Elliott, Aurelius and Citibank declined to comment.
Individual investors are being shut out of a private placement of $750
million in newly minted Peabody preferred stock - at a 35 percent
discount to the company's estimated valuation. The sale of stock, which
comes with attractive dividends and other benefits, is only open to
institutional investors who hold Peabody bonds, including the seven
Individual investors can, however, buy stock at a discount of at least
45 percent in a separate $750 million common stock offering, which is
also open to major funds.
In both stock sales, the number of shares investors are allowed to buy
is based on the amount of Peabody debt they hold.
Individual investors argue they should have access to both
opportunities, which would allow them to buy much more discounted stock.
Peabody and the hedge funds have argued in court that the private stock
placement is legal because it will be conducted separately from the
bankruptcy reorganization plan.
Individual investors contend that the private stock offering is integral
to Peabody's broader plan to exit Chapter 11 protection and should not
be considered as legally separate. PROFITING ON DEBT
Elliott and Aurelius first approached Peabody management in late 2015,
announcing themselves as "significant" holders of the company's
increasingly distressed debt, according to testimony by Peabody's chief
financial officer, Amy Schwetz.
In the following months, Elliott, Aurelius, and the other investment
funds negotiated the private stock sale with Peabody executives - who
will also get stock bonuses under the reorganization plan. The stock
grants to Peabody's six top executives, who ran the company before
bankruptcy, could be worth tens of millions of dollars.
The stock is coveted because Peabody's bankruptcy exit coincides with a
brightening coal industry outlook, at least in the short-term, amid
increased demand from Asia and expected deregulation under U.S.
President Donald Trump.
[to top of second column]
Peabody investor Edward Hindelang poses for a photo in Oslo, Norway
February 22, 2017. Photo taken February 22, 2017. REUTERS/Gwladys
There's no way to determine exactly how much the investment funds stand to gain
because it is not known what each of them paid for Peabody's bonds or what their
newly purchased stock will be worth on public markets.
But Elliott and Aurelius - derided as "vulture funds" by some critics - are
known for buying corporate debt at deep discounts and spending heavily on
litigation to try maximize their returns in bankruptcies.
other large holders of Peabody debt include Discovery Capital Management,
PointState Capital, Contrarian Capital Management, Panning Capital Management
and the South Dakota Investment Council.
The funds did not respond to requests for comment.
By buying stock at a 35 percent discount to Peabody's estimated valuation in the
private placement, institutional investors would receive about $1.2 billion in
stock for an investment of $750 million. The funds could also buy large portions
of the common stock being offered to all investors at a 45 percent discount.
Opponents of Peabody's plan say the hedge funds' profit may be much larger
because Peabody's estimated market capitalization of $3.1 billion is
unrealistically low, failing to account for the improved coal outlook. The
opponents have projected that Peabody's market capitalization upon bankruptcy
exit will be $5.4 billion.
funds, however, took on big risks in carrying Peabody's distressed debt through
bankruptcy, said David Tawil, president of the Maglan Capital hedge fund.
Firms such as Elliott and Aurelius often seek out investments with the potential
for all-or-nothing outcomes, he said.
"You need a tremendous stomach," he said.
PENNIES ON THE DOLLAR
In late 2015 - when Elliott and Aurelius first disclosed their Peabody bond
holdings - global coal consumption was plummeting and U.S. power plants were
switching to ever-cheaper natural gas from shale fields.
Peabody faced a looming cash crisis. In debt-market trading, the company's
unsecured bonds fell from 30 cents on the dollar in October 2015 to a low bid
price of 2.5 cents in February 2016, according to Reuters data.
the hedge funds, some individual investors saw an opportunity in the beaten-down
Joel Packer - an entrepreneur and hedge fund founder who invested retirement
funds in Peabody bonds - was attracted by the potential returns. He never
imagined that a bankruptcy could result in a lucrative private stock offering
that shut out individual investors.
"I was looking for yield. Rates were down, and coal was really in the garbage
pail," said Packer, 73. "It was inconceivable that they would distinguish
between individual investors and institutions."
Packer is now among the investors suing Peabody and six of the seven funds for
denying them access to the private stock placement. A separate trial on the
individual investors' lawsuit is scheduled for May 17 in St. Louis.
Attorney David Kovel, who represents Hindelang, Packer and two other investors,
argues the hedge funds are stretching the law at the expense of creditors with
"Hedge funds and other powerful stakeholders are testing the bounds of
bankruptcy law," Kovel said. "As the bounds go upward, they'll be pushing the
(Reporting by Tracy Rucinski in Chicago and Tom Hals in Wilmington, Delaware;
Editing by Noeleen Walder and Brian Thevenot)
[© 2017 Thomson Reuters. All rights
Copyright 2017 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.