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Murray Energy Said to Pay for Coal Slump in Buyout Financing

Murray Energy Corp. is paying the price for the coal industry’s worst slump in decades as it funds a $1.4 billion purchase of Foresight Energy LP.

Murray is marketing a $1.6 billion loan that would initially pay interest of 6.75 percent and be sold to investors at 98 cents on the dollar, according to a person with knowledge of the deal. The loan would pay 5.75 percentage points more than the London interbank offered rate, or 1.66 percentage points more than the average for new loans to similarly rated companies tracked by Standard & Poor’s.

The company, led by fourth-generation coal miner Robert E. Murray, is buying 50 percent of St. Louis-based Foresight to give it a bigger presence in the Illinois basin, a bright spot in an industry contending with slumping prices. Murray is tapping debt markets at a time when investors are demanding higher yields to lend to producers of the commodity.

“It’s not cheap,” said Spencer Cutter, a Bloomberg Intelligence analyst who estimates the debt will effectively yield about 7.25 percent. “The coal sector is in a depression right now.” Even though the acquisition is a good deal for Murray, he said, coal prices are “not showing signs of rebounding anytime soon.”
Murray Bonds

Murray’s bonds have dropped from record highs in September to below face value this year, pushing yields to about 10 percent. Investors may demand more than that for a planned $860 million bond offering that will also help finance the acquisition, Cutter said in a March 20 report.

The spot price of coal mined in the Illinois Basin has fallen 27 percent from a high of $55.25 a ton in February 2012 amid a supply glut of the commodity and flagging demand, according to data compiled by Bloomberg.

Gary Broadbent, media director and assistant general counsel at Murray, didn’t comment on terms of the financing, instead referring to the company’s statements announcing the Foresight deal. As part of the debt funding, the companies will refinance existing Foresight debt.

Chief Executive Officer Murray, who founded the St. Clairsville, Ohio-based company in 1988, is targeting coal mines and reserves that he thinks can be the lowest-cost supplier of the fuel to coal-fired power stations. Combining with Foresight will create one of the country’s largest coal suppliers, with more than 9 billion tons of coal reserves, more than any other producer, data compiled by Bloomberg show.
‘Best-Positioned’

“The Illinois Basin is probably the best-positioned coal basin in the U.S.,” Anna Zubets-Anderson, a credit analyst at Moody’s Investors Service, said in a telephone interview. The combined companies will have a “pretty dominant position” in that low-cost region, she said.

Moody’s last week increased Murray’s rating by one step to B2, or five levels below investment-grade.

Under terms being marketed to investors, the 5.75 percentage point rate on the loan would be in addition to the floating Libor benchmark, which would be set at a minimum of 1 percent, according to the person with knowledge of the offering, who asked not to be identified citing lack of authorization to speak publicly on the matter.

The rate compares with a 4.09 percentage-point average spread over Libor for new loans sold to investors, according to the latest figures from S&P’s Capital IQ Leveraged Commentary & Data.

source: http://www.bloomberg.com