CONSOL Energy Inc. New First-Lien Debt Rated 'BB' (Recovery Rating: '1')

DALLAS (S&P Global Ratings) March 14, 2019 — S&P Global Ratings assigned its 
'BB' issue-level rating and '1' recovery rating to U.S.-based coal producer 
CONSOL Energy Inc.'s proposed $75 million first-lien term loan A due 2023, 
$300 million first-lien term loan B due 2024, and $350 million revolving 
credit facility maturing in 2023. The '1' recovery rating indicates our 
expectation for very high recovery (90%-100, rounded estimate: 95%) in the 
event of a payment default. 

We expect the company to apply proceeds towards repaying their $100 million 
first-lien term loan A due in 2021 ($74 million outstanding), and their $400 
million first-lien term loan B due in 2022 ($286 million outstanding). The 
balance of the proceeds will be used for transaction costs.  

The 'B+' issuer credit rating is unchanged, and the outlook remains stable. 
The 'B-' issue-level rating and '6' recovery rating on the company's 11.00% 
$300 million second-lien notes due 2025 is also unchanged. For the issuer 
credit rating rationale, see our Oct. 25, 2018 research update on CONSOL 
Energy Inc. 

RECOVERY ANALYSIS

Key analytical factors:
  • CONSOL's pro forma capital structure will include the $75 million first-lien term loan A due 2023, the $300 million term loan B due 2024, and the $350 million revolving credit facility due 2023 (this will replace the current $300 million revolving credit facility due 2021).
  • The company made a $110 million payment on the pre-existing term loan B in February, and the new facility will maintain excess cash flow sweep requirements determined by total net leverage levels.
  • The company also has $267 million outstanding in second-lien notes due in 2025, and recently extended the maturity on its $100 million A/R securitization facility to 2021.
  • The company has $103 million in outstanding industrial revenue bonds associated with its Baltimore marine terminal jointly guaranteed by CNX Resources (BB-/Stable)
  • Our recovery analysis contemplates recoveries in a default scenario associated with a sustained, severe drop in seaborne metallurgical coal prices, and sharply lower demand for domestic thermal coal. This would lead to negative free cash flow that strainsliquidity as the company manages interest and amortization charges, capital spending, and dividend payments. In the face of limited prospects for a turnaround in the coal markets, the company would not refinance its term loan, and while facing diminishing liquidity it would look to restructure.
  • We believe that in a default, there would continue to be a viable business model driven by the company's high quality reserves and low costs relative to peers in the northern Appalachian coal basin. Therefore, we assume the company would be reorganized rather than liquidation.
  • We estimate that about half of its tax-adjusted postretirement obligations would materialize as priority claims, and apply 5% of what would remain toward restructuring administrative expenses.
  • We subtract mandatory debt amortization through the default year from the claims at default; however, we assume there would be no cash flow sweep repayments in this distressed scenario.
  • We assume that the cash flow revolver would be 85% drawn at default, while the account securitization facility would be about 50% drawn limited by outstanding letters of credit.
Simulated default assumptions:
  • Year of default: 2023
  • EBITDA at emergence: $187 million (which takes into account our expectations for fixed charges and maintenance capital spending at default, as well as prospects for the thermal coal sector out of a cyclical trough)
  • Implied enterprise value multiple: 5x (in line with other rated metals and mining companies)
  • Gross enterprise value: $935 million
Simplified waterfall:
  • Net enterprise value (gross enterprise value, $935 million less adjusted postretirement obligations, $241 million; and restructuring administrative expenses, $35 million): $659 million
  • Priority claims (A/R securitization, $49 million; and other debt including capitalized leases, $19 million): $68 million
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  • Remaining enterprise value: $591 million
  • First-lien claims at default (revolving credit facility, $254 million; term loan A, $46 million; term loan B, $295 million): $595 million
  • --Recovery expectation: 90%-100% (rounded estimate: 95%)
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  • Negligible value expected to remain for other debt
  • Second-lien note claims at default: $282 million
  • --Recovery expectation: 0%-10% (rounded estimate: 0%)
Note: All debt amounts include six months of accrued but unpaid interest at 
default.