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Fitch downgrades Peabody on weak coal market

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World Coal,

Fitch Ratings has downgraded Peabody Energy’s Issuer Default Rating to CCC, indicating its view that there is now a real possibility that the world’s largest private-sector producer of coal could default.

“The downgrade reflects Fitch’s view that liquidity could become constrained in the absence of higher metallurgical coal prices,” the ratings agency said in a press release.

Fitch expects Peabody’s EBITDA to be about US$400 million this year with free cash flow burn of US$500 million. “While Fitch believes the cash flow burn would slow in 2016 and reverse in 2017 […] the total debt with equity credit to EBITDA could be about 7x in 2017, which could limit access to capital to refinance the US$1.5 billion notes due in 2018.”

Peabody has been hit by a drop off in thermal coal demand in its domestic US market, combined by oversupplied thermal and metallurgical coal markets globally. These market conditions have already seen rivals Patriot Coal and Walter Energy file for bankruptcy and Alpha Natural Resources delisted from the New York Stock Exchange following a collapse in its share price.

But the worst may now be upon us with Fitch saying its believed the coal markets are at or near the bottom of the cycle and should show slow recovery going forward.

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