Murray Energy founder Robert Murray, stepping aside as CEO in the wake of the company's bankruptcy, explains his company's business strategy to S&P Global Market Intelligence in this file photo.

Source: S&P Global Market Intelligence

In the weeks leading up to its petition for bankruptcy, Murray Energy Corp. sought out options to fund its financial restructuring but found few offers to support an overleveraged firm projecting a sharp decline in revenue in a shrinking coal market.

The nation's largest privately-held coal mining company presented its situation to several suitors but found little interest, bankruptcy filings show. The company forecasts declining coal revenues going forward as Murray Energy's significant debt and other liabilities further weigh down a company operating in a sector facing shrinking domestic coal markets and volatile demand abroad.

Coal production to drop

A presentation prepared in September for potential financiers of the reorganization shows the company's key business plan assumptions project coal sales of 54.2 million tons in 2019 but estimates the company's tonnage falling to as little as 32.6 million tons, a 39.9% drop in volumes, by 2028. Meanwhile, Murray Energy's coal sales revenue is expected to drop 42.2% from $2.32 billion to just $1.34 billion in the same period. Those figures do not include Foresight Energy LP and the company's metallurgical coal operations, which are not part of the company's bankruptcy reorganization.

Those figures also assume Murray Energy's Colombia operations shut down from September 2019 and onward. The mines, which Murray bought in 2015, produced 4.6 million tons of coal in the yearlong period ending June 30.

In its September presentation, the company forecast that overall capital expenditures for its mines would fall from $245 million in 2019 to $63 million in 2028.

"Murray is well-positioned to take advantage of the industry's need for a minimum proportion of the installed power grid capacity, given its coal reserves located in strategically-optimal mining regions near coal-fired power plants, and key rail and waterway transportation routes," Murray Energy President and CEO Robert Moore said in a bankruptcy court declaration.

While the market for coal abroad routinely fluctuates, Murray Energy's business is driven by domestic thermal coal sales. Natural gas and renewable energy infrastructure are largely replacing coal plants due to lower costs, regulatory challenges and other obstacles stacked against coal generation. The company is also saddled with significant legacy liabilities — including other post-employment benefits, workers compensation, black lung expenses, pensions and other obligations — that totaled $5.83 billion, according to the bankruptcy court documents.

Murray Energy's presentation also shows the company's assumptions for its bankruptcy reorganization anticipated a $20 million package of incentives and retention payouts, which are often offered to executives and other members of management in bankruptcy cases.

Marketing a coal bankruptcy

Murray Energy engaged investment bank advising firm Evercore Group LLC in the summer of 2019 to try to fix its balance sheet and secure the "immediate capital infusion" needed to keep operations running, court filings show. Without enough cash to operate and pay debts as they came due, Murray Energy first sought out-of-court financial options to manage its significant liabilities but found few options available to them.

With Evercore, Murray Energy began "pursuing parallel paths to address the debtors' over-leveraged capital structure and sizeable debt-service requirements" in mid-September. Murray Energy's initial discussions centered on a transaction that would offer additional runway to weather a shift in coal markets but found its proposals a tough sell given nearly all of its assets were already encumbered.

The company even looked at the possibility of selling off some of its assets.

"Ultimately, efforts to monetize these assets were not fruitful and not achievable within the required timeframe," wrote Gregory Berube, senior managing director of Evercore's restructuring and debt advisory group, in a bankruptcy filing.

The company kept operations afloat with a forbearance agreement struck in early October while it tried to "negotiate a smooth landing into Chapter 11." Murray Energy determined the company needed approximately $250 million to do so.

Evercore shopped around for financing proposals that would provide new money and replace its existing debt facilities. They contacted 24 parties, including 15 third-party financing sources typically in the business of extending such offers. Despite contacting five commercial banks and 10 institutional lenders, only five parties took enough interest to sign agreements to view the company's financial information.

"None of these third-party financing sources indicated a willingness to provide the debtors with new money financing" on the terms the company required, Berube wrote. Only two proposals were ultimately received, neither of which would fully meet the Murray Energy's needs. Evercore also approached a vendor and other creditors, but none offered a bankruptcy financing proposal.

Turning to ad hoc lenders

Ultimately, the company determined that third-party debtor-in-possession financing would require "a risky and costly 'priming' fight or valuation dispute with their prepetition lenders." So, they struck a deal with an ad hoc group of their lenders that refinances its asset-based lending facility; rolls up its first-in, last-out facility; offers $250 million in new money; and eliminates previous borrowing base requirements.

The requirements of calculating Murray Energy's borrowing base limited the amount of money the company could access. Murray Energy's borrowing base fluctuated as much as $30 million over the past 15 months and even dropped by approximately $20 million while the company was preparing its restructuring. Keeping track of its borrowing base had become a weekly task and "drained the time and attention of senior management," a court filing states.

The financing package was challenged by Black Diamond Commercial Finance LLC, which said the timing of the borrowings and the fees associated with the deal were prejudicial to specific lenders and the unsecured creditors in general.

"The overall cost of the priming DIP Facility is simply excessive, and undoubtedly reflects the failure of the debtors to timely seek adequate alternative financing," Black Diamond wrote, noting the annualized rate of return on the facility is 28%. "Given the complexity of these cases and the diligence required to commit to a financing of this nature, a mere 30 day marketing period is too short."

Black Diamond suggested the court instead require Murray Energy to use the time between interim and final hearings to remarket its debtor-in-possession facility to seek better terms, but the post-petition financing package was approved in an Oct. 31 order.