Cloud Peak Energy Corp. has gained another 15-day reprieve from a $1.8 million interest payment on a portion of its long-term debt and continuing months of speculation that the company may eventually file for Chapter 11 bankruptcy reorganization.
The company announced an agreement for the short forbearance with its debt holders Monday morning in a filing with the federal Securities and Exchange Commission. The agreement includes Cloud Peak will not be considered in default of the debt and that it won’t affect its other debt obligations.
The payment was originally due March 15, but Cloud Peak exercised a 30-day grace period.
While it may have put off taking more drastic legal action, May 1 now becomes the next important date for Cloud Peak’s financial future. Not only will that see the end of the deferral, that’s also when a $17.4 million payment on the company’s 2021 notes is due.
For the most part, Monday’s forbearance means more of the same for Cloud Peak and represents little risk for the company’s creditors, who have more to lose under a bankruptcy filing, said Rob Godby, director for the Center for Energy, Economics and Public Policy at the University of Wyoming.
“Today’s filing was kind of a nothing-burger,” he said. “It’s more of the same. It tells us the next deadline is the end of the month, but at the end of the month it will be even harder to thread the needle.”
He also said that because the company has already put off making its interest payment for 30 days and now has a forbearance for another 15, it’s “very unlikely” that payment will be made.
“Why would you delay a payment one month only to make it?” he said. “If you did make the payment by (the deadline on) Monday, that would be suggestive of just how precarious finances are at the company, needing an extra month to make the payment.”
The timing of Cloud Peak’s announcements sends a message that it’s “thinking about the optimal time to declare bankruptcy,” he said. “The question changed (March 15) when they suspended payment from ‘will you declare?’ to ‘when will you declare?’”
What a forbearance does is hold out some hope, however remote, that Cloud Peak Energy could — however unlikely — find an angel that could allow it to avoid bankruptcy, Godby said.
“This is like treading water in the ocean,” he said. “You’re waiting for a ship to come by and rescue you, but the bottom line is you’re still in the middle of the ocean. You can give up and slip under, but you keep going even though it looks like it’s hopeless. It’s just survival instinct at this point.”
Despite Cloud Peak’s uncertainty, the company states that operations will continue at its three Powder River Basin mines, Antelope and Cordero Rojo in Campbell County and Spring Creek in Montana.
The mines employ nearly 1,250 people and produced nearly 50 million tons of coal in 2018.
Although Chapter 11 is where Cloud Peak may finally find itself, that’s the last thing its creditors want, Godby said. Through that process, most will only get pennies on their investments.
“At the end of the day, the problem of a bankruptcy is an admission there will be a significant loss to creditors,” he said. “So, if the creditors are OK with you treading water for a little while longer, that’s what you do.”
Monday’s SEC filing is clear that Cloud Peak Energy’s business “remains uncertain and fluid” and that it “will need to restructure our balance sheet in order to improve our capital structure, adjust our business to ongoing depressed PRB thermal coal industry conditions, address our significantly reduced liquidity and continue as a going concern.”
Because of the threat of bankruptcy, Cloud Peak’s creditors likely see little risk in giving the company some more time to try and find other alternatives, Godby said.
“To some extent, the creditors are in the ocean with them,” he said. “They have nothing to lose by putting that off and trying to avoid (bankruptcy).”