UPDATE: S&P Cuts Peabody Energy (BTU) to 'CCC+'; Outlook Negative

(Updated - January 15, 2016 2:57 PM EST)

Standard & Poor's Ratings Services downgrades Peabody Energy (NYSE: BTU) from 'B' to 'CCC+', outlook Negative.

Standard & Poor's Ratings Services said today it lowered its corporate credit rating on St. Louis-based Peabody Energy Corp. to 'CCC+' from 'B'. The outlook is negative.

We also lowered our issue-level rating on the company's first-lien debt to 'B' from 'BB-'. The '1' recovery rating on the debt remains unchanged, indicating our expectation of very high (90% to 100%) recovery in the event of a payment default.

At the same time, we lowered the issue-level rating on the company's second-lien debt to 'CCC+' from 'BB-'. We also revised the recovery rating on the debt to '4', indicating our expectation of average (30% to 50%; upper half of the range) recovery in the event of a payment default, from '1'.

In addition, we lowered the issue-level rating on the company's senior unsecured debt to 'CCC-' from 'B-' and revised the recovery rating on the debt to '6', indicating our expectation of negligible (0% to 10%) recovery in the event of a payment default, from '5'.

We also lowered the issue-level rating on the company's junior subordinated debt to 'CC' from 'CCC'; it remains three notches below the corporate credit rating in accordance with our notching guidelines.

"The negative outlook mirrors our decidedly negative outlook for the domestic coal sector over the next year. A significant portion of the supply base has been or will be undertaking restructuring efforts that will alter the competitive landscape, making it more challenging for companies with weaker balance sheets," said Standard & Poor's credit analyst Chiza Vitta. "Peabody is pursuing alternatives for its capital structure targeted toward reducing leverage while maintaining liquidity, but the capital markets remain unfavorable to the coal sector."

We would lower the rating if Peabody announced a debt purchase or exchange, which we would view as distressed under our criteria. We could also lower the rating if sources of liquidity fell short of covering a year's worth of operations. This could happen if credit measures deteriorated to the point that financial covenants restricted revolving credit facility availability.

We could revise the outlook to stable if our outlook on the coal sector improved, particularly if operating performance strengthened such that the company sustained positive free cash flow. The outlook would also be revisited, along with the rating, if Peabody concluded any restructuring efforts.

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