Debtwire Broadcast:
Walter Energy Enters Chapter 11
Debtwire’s team of reporters and analysts hosts a roundtable
discussion exploring the legal arguments and valuation variables
likely to shape Walter Energy’s bankruptcy case | 17 July 2015
Agenda


Opening Remarks: Andrew
Descent into Chapter 11: Madalina
–
–
–

Overview
Dual track plan
Sector Impact

– Prepetition Capital Structure Overview
– Projection
– Company Valuation

–
–
Plan/Sale Dual Track Process
Venue
Union and Pension Issues
Coal Company Legacy Liabilities
Strategies for Investor Involvement
 Achieving an Equity Slice
 Maximizing Out-of-the Money Recoveries
Official Committee Concerns
Other Considerations
 Collateral Packages
 Blue Creek
 Administrative Priority Claims
 Executory Contract Assumption
 NOLs
 Intercompany Transfers
 Customer Relationships
Appendix:
– Proprietary News
– Legal Analysis
– Financial Research
The Road Ahead: Jack
–
–
–
–
–
Financial Analysis: Tim

Biographies
2
Descent into Chapter 11

Ch. 11 filing is the culmination of:
– Slump in metallurgical coal prices
– Idling mines, slashing capex to extend liquidity runway
– Futile debt offerings
– Bondholder Leapfrogging
3
Descent into Chapter 11

Dual track plan
– Equitize first lien debt, or,
– Complete an auction
4
Descent into Chapter 11

Sector Impact
– Consolidation
– Alpha Natural Resources, Arch Coal, Murray Energy, Blackhawk
Mining, Patriot Coal, James River Coal, Walter Energy
5
The Road Ahead

Plan/Sale Dual Track Process
– Plan: First lien creditors using fulcrum status to receive reorganized equity on
account of claims.
– Sale: First lien credit bid would impose high hurdle for competing bids.

Toggle: The toggle between the two revolves around the ability to achieve union
concessions whether the Bankruptcy Court will permit a sale that leaves
union liabilities behind.

Administrative Claims and Chapter 7:
High administrative claims plus no cash proceeds might mean a chapter 7
conversion post-sale, but will the Bankruptcy Court allow it?
– Cash Collateral:

Seven month timeline with guiding milestones.

Second lien silence.
6
The Road Ahead

Venue
– Importance for coal and union liability issues.
– Barriers to efforts to transfer.

Union and Pension Issues
–
–
–
–

Concessions required by first lien creditors.
USW looming CBA expiration.
The 1113/1114 fight.
USD 661m pension withdrawal liability threat.
Coal Company Legacy Liabilities
– AROs, Black Lung and MSHA.
– Surety involvement.
7
The Road Ahead

Strategies for Investor Involvement
– Achieving an Equity Slice:
Hurdles to becoming a successful plan sponsor or asset purchaser will tip the scale to
maximizing litigation leverage in order to get a piece of the action.
 Chiseling away at first lien position by attacking liens, lender liability claims and securing a
second lien position.

– Maximizing Out-of-the Money Recoveries:
Potentially small pot of unencumbered assets.
 Leverage in seeking avoidance of the reconsidered prepetition first lien interest payment.


Official Committee Concerns
– Membership: Indenture trustees, PBGC and a few trade.
– Cash Collateral Fights: Monthly fee cap, investigation budget/timeframe and liens on
avoidance action proceeds.
8
The Road Ahead

Other Considerations
– Collateral Packages: Investigating the holes in US and Canadian guarantees, pledges and
collateral overlap between debt issuances.
– Blue Creek: Rights underlying significant future development prospects are unencumbered.
– Administrative Priority Claims: Potentially significant IRS, WARN and other employee-related
liability exposure may threaten plan feasibility.
– Executory Contract Assumption: Exploring anti-assignment concerns.
– NOLs: Valuable assets to be preserved (USD 550m federal income tax, USD 425m federal
alternative minimum tax)
– Intercompany Transfers: Co-owned vendors and intercompany accounting to be considered,
including approximately USD 2bn in “hybrid financing” between US and Canadian entities.
– Customer Relationships: Small, foreign customer base.
9
Financial Analysis – Pre Petition Capital Structure
Pre-Petition Capital Structure
USD 76.9m First Lien Revolver (73m LC)
First Lien Term Loan B
First Lien Notes
1
1
Capital Lease & Equip. Financing
Second Lien PIK Notes
1
1
Coupon
Face Amount
Price
Market Amount
Yield
Maturity
Est. Annual Interest
L + 5.5%
0
67.0
0
64.0%
01 Oct 2017
-
L + 6.25%
978
51.0
499
34.6%
01 Apr 2018
71
9.5%
970
52.0
504
30.3%
15 Oct 2019
92
-
14
-
14
-
-
-
11%/12%
361
5.5
20
-
01 Apr 2020
40
Secured Obligations
2,323
1,037
203
Senior Unsecured Notes
9.875%
388
1.5
6
-
Senior Unsecured Notes
8.5%
383
3.0
11
249.5%
Consolidated Debt
Less: Cash as of 6/30/15
Net Debt
2
3,094
1,055
270
270
2,824
785
15 Dec
2020
15 Apr 2021
38
33
274
(1) The Canadian guarantors only guarantee the obligations incurred under the Canadian Revolver. According to the lender presentation (pg.23), the Canadian obligations
comprise approximately 70% of revolver availability, of which USD 24m is committed to undrawn LC's. The term loan, 9.5% first lien notes ,and the second lien PIK notes all
have a 65% residual stock pledge of the Canadian assets.
(2) USD 270m cash balance disclosed in CFO declaration, as of 30 June 2015.
Source: SEC Filings, MarketAxess, Markit, Debtwire Analytics, Court Documents
10
Financial Analysis – Projections
Financial Forecast (USDm)
Benchmark Met Price
Total Revenue
Cash Cost of Sales
Transportation Minimum Penalties
SG&A
Postretirement Benefits
Other Savings Initiatives
1113 EBITDA Impact
EBITDA
Working Capital
Capex
Sales of Investment
Unlevered Free Cash Flow
Cash Interest
Professional Fees
Admin. & Other Claims
Adequate Protection Payments
Emergence Proceeds
Restructuring Adjustments/Other
Free Cash Flow
Revolver Draw
Cash Flow

TBD
Beginning Cash
Ending Cash
2015
$104
999
(1,014)
(4)
(67)
(54)
6
(134)
37
(82)
(2)
(181)
(109)
(55)
(54)
(399)
(399)
2016
$107
978
(943)
(8)
(64)
(55)
39
(53)
31
(87)
(109)
(55)
(26)
(11)
(201)
(201)
2017
$109
1,073
(1,069)
(3)
(64)
(55)
39
(79)
2
(116)
(193)
(193)
(193)
469
70
70
(131)
(131)
(324)
Source: 8-K Filed 7/15/15, Ex. 99.2 "Project Diamond Lender Presentation" Pg.40
* See lender presentation pg. 44-45 for monthly income statement projections.
Pro Forma Balance Sheet (USDm)
Cash & Equivalents
Restricted Cash
Net Receivables
Inventories
Other Current Assets
Total Current Assets
Long Term Assets
Total Assets
FYE15
69
42
207
158
74
549
4,213
4,762
FYE16
(131)
20
207
160
74
328
4,161
4,489
FYE17
(325)
20
214
177
74
160
4,133
4,293
63
219
282
45
219
264
50
219
269
-
-
-
Long Term Liabilities
Liabilities Subject to Compromise
Total Liabilities
912
3,834
5,028
940
1,205
967
1,236
Beginnings Stockholder Equity
Plus: Net Income
Other
Total Stockholder Equity
283
(540)
(9)
(266)
(266)
3,550
3,284
3,284
(227)
3,057
4,762
4,489
4,293
10
(18)
(43)
Accounts Payable & Accrued Expenses
Accum. Postretirement Benefits
Other Current Liabilties
Total Current Liabilties
Revolver
Term Loan B
9.5% Sr. Sec. Notes
11/12% PIK Notes
9.875% Unsecured Notes
8.5% Unsecured Notes
Other Debt, Net of Discount
Total Liabilties & Stockholder Equity
Memo: Proj. Canadian & UK Cash Balance
Source: 8-K Filed 7/15/15, Ex. 99.2 "Project Diamond Lender Presentation" Pg.41-42
* See lender presentation for monthly projections.
Projected Cash Flows (USDm)
Net Income (Loss)
Adjustments
Depreciation & Depletion
Deferred Income Tax Expense (Benefit)
Deferred Taxes Payable
Postretirement Benefits/Capital Lease Amort.
Receivables
Inventories
Prepaid Expenses/Other Current Assets
Accounts Payable
Accrued Expenses/Other Current Liabilties
Cash Flows Provided by Operating Activities
2015
(539)
2016
3,550
2017
(227)
224
0
(26)
(621)
12
44
(1)
6
(133)
(1,076)
139
28
0
(2)
(2)
(16)
3,720
144
27
(7)
(18)
5
(77)
(82)
(2)
(84)
(87)
(87)
(116)
(116)
Cash Flows Provided by Financing Activities
(978)
(970)
(350)
(388)
(383)
(12)
3,834
8
761
(3,834)
(3,834)
0
Cash Flows Provided by Continuing Operations
(400)
(200)
(193)
469
(400)
69
69
(200)
(131)
(131)
(193)
(325)
Investing Activities
Capex
Sale of Investments
Other
Cash Flows Used in Investing Activities
Financing Activities
Revolver
Term Loan B
9.5% Sr. Sec. Notes
11/12% PIK Notes
9.875% Unsecured Notes
8.5% Unsecured Notes
Other Debt, Net of Discount
Liabilities Subject to Compromise
Dividends
Share Issuance
Beginning Cash
Change in Cash
Ending Cash
Source: 8-K Filed 7/15/15, Ex. 99.2 "Project Diamond Lender Presentation" Pg.46-47
* See lender presentation for monthly projections.
11
Financial Analysis – Valuation
EV Waterfall (Based on historical EBITDA Range)
Waterfall Assumptions:
(1) Bankruptcy administrative fees of USD 100m.
(2) Existing cash excluded from recovery.
(3) Outstanding LC's included in Sr. Sec. Obligations.
Admin Claims
Senior Secured Obligations
USD 76.9m First Lien Revolver (73m LC) 1
73
First Lien Term Loan B 1
978
First Lien Notes 1
970
Capital Lease & Equip. Financing
14
2,035
Multiple
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
$50
200
225
250
275
300
325
$100
400
450
500
550
600
650
EBITDAX (USD m)
$150
$200
600
800
675
900
750
1,000
825
1,100
900
1,200
975
1,300
$250
1,000
1,125
1,250
1,375
1,500
1,625
$300
1,200
1,350
1,500
1,650
1,800
1,950
1,100
1,250
1,400
1,550
1,700
1,850
54%
61%
69%
76%
84%
91%
$100
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
100
125
150
175
200
225
Residual Value for Senior Secured Obligations
300
500
700
900
350
575
800
1,025
400
650
900
1,150
450
725
1,000
1,275
500
800
1,100
1,400
550
875
1,200
1,525
$2,035
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
5%
6%
7%
9%
10%
11%
% Coverage for Senior Secured Obligations
15%
25%
34%
44%
17%
28%
39%
50%
20%
32%
44%
56%
22%
36%
49%
63%
25%
39%
54%
69%
27%
43%
59%
75%
12
Financial Analysis – DCF Valuation
Mine #4
Tonnes Produced (000's)
Price ($/Ton)
Revenue (USDm)
2014
2,468
$112
276
2015
2,945
$98
289
2016
2,671
$102
272
2017
2,720
$105
286
Cash Cost of Sales ($/Ton)
Cost (USDm)
$105
(281)
$95
(280)
$101
(270)
$102
(277)
EBITDA ($/Ton)
EBITDA
7
(4)
3
9
1
3
3
8
Capex
(29)
(21)
(33)
(61)
Mine #7
Tonnes Produced (000's)
Price ($/Ton)
Revenue (USDm)
2014
4,741
$118
559
2015
3,998
$99
396
2016
3,811
$104
396
2017
4,506
$107
482
Cash Cost of Sales ($/Ton)
Cost (USDm)
$92
(443)
$98
(392)
$91
(347)
$104
(469)
26
117
1
4
13
50
3
14
EBITDA ($/Ton)
EBITDA
West Virginia
Maple Surface
Tonnes Produced (000's)
Price ($/Ton)
Revenue (USDm)
2014
2015
2016
2017
454
$74
34
280
$66
18
442
$72
32
424
$74
31
Cash Cost of Sales ($/Ton)
Cost (USDm)
$63
(29)
$71
(20)
$63
(28)
$63
(27)
EBITDA ($/Ton)
EBITDA (USDm)
11
5
(5)
(1)
9
4
11
5
Maple Underground
Tonnes Produced (000's)
Price ($/Ton)
Revenue (USDm)
Walter Gas
EBITDA
Cash Cost
of(USDm)
Sales ($/Ton)
Cost (USDm)
(44)
(49)
(39)
255
$98
25
2015
$105
(40)
EBITDA ($/Ton)
EBITDA
(3)
418
$85
36
2016
$104
(27)
3
413
$82
34
2017
6
$96
(40)
$97
(40)
1
0
(6)
(2)
(11)
(5)
(15)
(6)
(20)
(6)
(9)
(8)
2015
(3)
2016
3
2017
6
Low Price ($/Ton)
Mid Price ($/Ton)
High Price ($/Ton)
8.0
$80.00
$100.00
$120.00
Cash Cost of Sales ($/Ton)
Capex (USDm)
SG&A (USDm)
$95.00
90
60
Low Case Margin (USDm)
Mid Case Margin (USDm)
High Case Margin (USDm)
-270
-110
50
Assigned Reserve Life
Discount Rate
15
10%
Est. High DCF Value
(+) Est. Value of Gas Ops
Est. Total Value
Est. Recovery for First Liens
380
25
405
20%
Source: Debtwire Analytics
Total Capex (USDm)
Capex
381
$106
40
US Coal DCF Analysis
Annual Production (Million Tons)
(41)
Walter Gas
EBITDA (USDm)
Source: Lender presentation, Pg. 33-36
13
Financial Analysis
Source: Lender presentation, Pg. 22
14
Debtwire Broadcast:
Walter Energy Enters Chapter 11
Appendix
Appendix: Debtwire Proprietary News
Article Link
Date Published
Walter Energy taps local Alabama counsel for restructuring
21-May-15
Walter Energy unsecureds enlist Davis Polk, Houlihan; management mulls venue options
04-May-15
Walter Energy first lien bonds tap FA ahead of unsecured coupon payments
08-Apr-15
Walter Energy first lien recoveries could diverge on Canadian collateral
26-Mar-15
Walter Energy adds to restructuring advisory roster
20-Mar-15
Walter Energy selects advisor as first liens tap legal
11-Mar-15
16
Appendix: Legal Analysis
Analysis Link
Date Published
ANALYSIS: Debtwire reviews common coal company restructuring issues to guide
stakeholder strategy
20-May-15
ANALYSIS: Walter Energy venue choice will determine leverage with unions
08-May-15
17
Appendix: Financial Research
Analysis Link
RESEARCH: Walter Energy first liens price in turnaround optionality
Date Published
16-Jul-15
18
Debtwire Broadcast:
Walter Energy Enters Chapter 11
Biographies
Biographies
Tim Hynes
Head of Distressed Research, North America | Timothy.Hynes@debtwire.com
Prior to joining Debtwire he was Head of Debt Capital Markets at Gleacher and Company.
Mr. Hynes has also held positions at Cerberus Capital, Bankers Trust and GE Capital.
Mr. Hynes received a BA in Finance from Michigan State University.
Andrew Ragsly
Managing Editor, North America| Andrew.Ragsly@debtwire.com
The team of journalists Andrew manages in New York routinely breaks news in restructuring,
distressed and primary market situations. Editorial content also delves
into detailed analysis of recovery scenarios, relative value and buyside strategy.
Andrew joined Debtwire in 2007 as a reporter covering industrial sectors. He became deputy editor
of Debtwire North America in 2011, and took over as managing editor in 2012.
20
Biographies
Jack M. Tracy II
Senior Legal Analyst, North America | Jack.Tracy@Debtwire.com
Jack is a former practicing restructuring attorney. Prior to joining Debtwire as Senior Legal Analyst,
Jack practiced in the New York offices of Akin Gump Strauss Hauer & Feld LLP and Willkie Farr &
Gallagher LLP.
He has represented debtors, official committees and ad hoc groups in several high-profile
restructurings, including James River Coal, Energy Future Holdings, Edison Mission Energy, Nortel
Networks, Cengage Learning, Otelco and Broadview Networks.
Madalina Iacob
Senior Reporter, North America | Madalina.Iacob@debtwire.com
Madalina Iacob is a senior distressed debt reporter for Debtwire, covering the energy sector and
telecommunications. She writes breaking news stories and analytical articles on distressed borrowers and
debtors including Energy Future Holdings, ATP Oil & Gas, Samson Resources, Patriot Coal and Nortel.
She received a M.A. in Business and Economic Reporting from New York University and an M.A. in
European Politics & Policy from Manchester University, UK, where she was an Open Society
Foundation/George Soros scholarship recipient.
21