UPDATE: S&P Downgrades Peabody Energy (BTU) to 'BB-'; Outlook to Stable

(Updated - July 15, 2015 12:22 PM EDT)

Standard & Poor's Ratings Services said it lowered its corporate credit rating on Peabody Energy Corp. (NYSE: BTU) to 'B' from 'BB-'. The outlook is stable.

At the same time, we lowered the issue-level rating on the company's senior secured debt to 'BB-' from 'BB+'. The '1' recovery rating on the debt remains unchanged and indicates our expectation of substantial (90% to 100%) recovery in the event of a payment default. In addition, we lowered the issue-level rating on the company's senior unsecured debt to 'B-' from 'B+'. The '5' recovery rating on the debt remains unchanged and indicates our expectation of modest (10% to 30%; upper half of the range) recovery in the event of a payment default. We also lowered the issue-level rating on the company's junior subordinated debt to 'CCC' from 'B-'; it remains three notches below the corporate credit rating in accordance with our notching guidelines.

Although it has been our view that coal industry operating conditions would remain weak in 2015, pricing for met coal has contracted more than we expected, with the met coal benchmark falling to $93 per metric tonne (Mt) for the third quarter of 2015. In addition, we anticipate that the oversupply in the met coal markets will take at least a year to clear and a price recovery will be prolonged and capped around $125/Mt in the medium term, well below previous highs.

"The stable outlook is based on our view that--potential restructuring costs notwithstanding--there is limited additional downside to Peabody's Australian metallurgical coal business," said Standard & Poor's credit analyst Chiza Vitta. "In addition, we expect the western U.S. mining segment, which has emerged as the largest EBITDA contributor, will continue to operate at relatively steady levels of profitability and production. As a result, we expect credit measures to remain within current ranges over the next 12 months."

We could lower the rating if we no longer considered liquidity to be strong. This could happen if the cushions relating to secured debt leverage or interest coverage covenants dropped below 30%. We could also lower the rating if we no longer considered the company's business risk profile to be fair due to permanent shifts in the competitive environment.

We could raise the rating if EBITDA margins rise above 25% or leverage drops below 5x, while maintaining strong liquidity. This could happen if coal prices improve more quickly than we currently anticipate or if the company's efforts to cut costs and shed less profitable operations have enough of an impact.

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