July 1, 2019
The macro environment has been largely unforgiving to coal country.
Blackjewel LLC and three affiliates are the latest in a long string of coal companies to file for bankruptcy. The debtors mine and process metallurgical, thermal and other specialty and industrial coals; they operate 32 properties and hold over 500 mining permits — “more than any other enterprise in the country.” Their operations are in the Central Appalachian Basin in Virginia, Kentucky and West Virginia and the Powder River Basin in Wyoming; they employee 1,700 people (1,100 in the east and 600 in the west).
The debtors blame the usual macro factors for their descent into bankruptcy court: (i) declining commodity prices, (ii) reduced domestic demand for met and thermal coal, (iii) compliance costs, (iv) the rise of natural gas, (v) the increased adoption of renewables, and (vi) decreased coal-fired power generation. This is a telling stat, per the debtors:
Thermal coal demand in the domestic electric power sector has declined from 935 million tons in 2011 to 636 million tons in 2018 and coal has seen its share of the domestic electricity generation market reduce from 43% in 2011 to 31% in 2017.
On a micro level, the debtors suffered from company-specific issues including (a) the termination of a major contract with Nobel Group, (b) a major roof collapse at a particular mine that shut down production, (c) changes to Kentucky’s workers’ compensation laws that increased insurance rates, (d) poorly timed hedging agreements, and (e) interestingly, bad weather. Yes, that’s right: it isn’t just retailers who blame weather for poor performance. Per the debtors:
Various flooding events across the midwest in 2019 have severely impacted rail shipments from the Debtors’ Western Division mining operations. Starting in March 2019, the Debtor started to experience a material reduction in shipments by rail due to severe damage to the rail lines used to move the Debtors’ coal. The impact from the flooding is ongoing, with an estimated $30 million in lost sales directly attributable to it.
PETITION Note: There’s no way to know whether these “flooding events” are the result of man-made global warming but, if so…well, you know where we’re going with this. Irony to the utmost!
All of these factors — and some recent mine acquisitions from previously bankrupted coal companies — combined to seriously constrain liquidity and, after a little refinancing foreplay, term lender Riverstone Credit Partners decided it wanted out and pulled the plug from discussions. The debtors had no choice but to file for bankruptcy.
We were on a brief July 4-related break at the time of the debtors’ filing but suffice it to say that the filing was a sh*tshow. The company filed with a $20mm DIP commitment from company CEO Jeff A. Hoops Sr. and Clearwater Investment Holdings LLC, at an interest rate of LIBOR + 6% per annum, but that DIP fell apart prior to the debtors’ first day hearing putting the company on the brink of liquidation. Per The Wall Street Journal:
But the company learned before its debut appearance in West Virginia bankruptcy court that his bank froze funds Mr. Hoops believed would provide the necessary credit for the proposed financing, according to Blackjewel lawyer Stephen Lerner.
“It’s frankly a disaster,” Mr. Lerner said during the hearing in the U.S. Bankruptcy Court in Charleston, W.Va.
While this surely sucked for the professionals involved, we especially feel for the 1,700 employees whose lives were altered over night — right on the eve of July 4th. Compounding matters is the fact that, apparently, the debtors cut checks to their employees prior to the filing that are not being accepted or are being dishonored by Commonwealth banks. WHAT. A. SH*TSHOW. 🙈The court held a separate hearing on this subject on Saturday, July 6.
Ultimately, Riverstone jumped in and — oddly enough considering its role in precipitating this whole bankruptcy dance to begin with — offered a lifeline. In what may be the shortest interim DIP financing order we’ve seen ever (3 pages), the bankruptcy court approved a $5mm super-priority senior secured DIP facility ($4.25mm from Riverstone, $750k from United Bank) at LIBOR + 8.5%. The use of proceeds? To ensure security measures are in place at the mines to preserve and protect property and equipment; to pay firefighting personnel needed to extinguish active fires at the mines; to fund a $500k professional fee escrow; and to pay for other essential emergency expenses. We presume the latter would include making sure employees — who, to be clear, were abruptly sent home — get paid. Other conditions of the DIP facility? Mr. Hoops got the heave-ho and FTI’s David Beckman was appointed Chief Restructuring Officer with CEO-esque authority. Savage move by Riverstone but we all know that old adage about money talking.
But why though?
Among other things coming to light, the Hoops-controlled debtors apparently floated cashier’s checks to their 600 Wyoming employees rather than follow typical direct deposit practices. Per the Gillette News Record, the bankruptcy court judge was pissed:
“I know this may be interfering with the holiday plans for some of you, but I’m sure you’d agree it’s minimal (compared) to what these employees are dealing with,” Volk scolded during an emergency hearing he called on the Fourth of July after he began hearing reports of people not being paid.
To make matters worse, in a liquidity exercise to the extreme, the debtors apparently also deducted $1.2mm of employee money from paychecks for 401(k) contributions but those amounts were never deposited into the appropriate accounts. SHEESH.
The human element of this cannot be overstated. More from the Gillette News Record (which you ought to read — it really puts this bankruptcy filing in perspective):
“I just hope these people can find jobs here and don’t have to leave,” said [Mayor Louise Carter-King], referring to the 2016 bust that saw the city’s population dip by about 2,000 as people left for work elsewhere. “That’s a big concern, but I also realize they’ve got to go where they can get jobs.”
She’s also worried for the small, local businesses and contractors that rely on performing work at the mines, especially those that might have to cut staff or shut their doors because they haven’t been paid by Blackjewel.
“Losing 600, 700 jobs has quite a trickle-down effect,” she said.
Shockingly, Fortune notes that coal mining jobs have actually “held steady under Trump”:
…per the Bureau of Labor Statistics: the number of coal workers rose from 50,500 in Nov. 2016 to 52,900 (preliminary) in May 2019. The rise has largely been attributed to demand from Europe and Asia—though overall demand has been steadily falling with exports down 7.4% in first quarter of 2019 year-over-year.
But in the long term, the trend of falling coal jobs expected to continue as the commodity comes under pressure against cheaper options such as natural gas.
“I can’t overstate the extreme competition between coal and natural gas,” Hans Daniels, CEO of Doyle Trading Consultants said last year.
Indeed, take a look at the BLS numbers:
