Walter Industries, Inc. (fka WLTGQ)

[Tommy]

$WLT - Walter Energy's Survival Options

http://seekingalpha.com/article/1688432-walter-energys-survival-options?source=email_rt_article_readmore

Walter Energy (WLT) was a source of worry for its shareholders for the most part of the year. The stock, which started the year above $35, has fallen to $10 in June, and revisited that level in August. Currently, it has managed to climb up to $15, but the worries persist.

The main point that spurred the fall of the stock earlier this year was Walter Energy's ability to service its huge $2.59 billion debt. The unsuccessful attempt to refinance part of this debt in June has thrown more wood into the fire. Getting money from the debt market would not get easier with a fresh downgrade from B to B- from S&P.

The debt load is a real problem. The company has spent $53.13 million on interest expense in the second quarter. In addition to that, Walter Energy had a $30.55 million operating loss. This means the company is losing money on both fronts, which is something that investors do not like at all.

The first big debt repayment for Walter Energy is scheduled in 2016. The company would have to repay $656.6 million of Term Loan A, which was taken in 2011 to finance the acquisition of Western Coal. I do not see how this sum of money could be produced in the remaining time. The pricing for met coal shows no signs of a big rebound, and Walter Energy struggles to operate profitably.

It means that the company would have to raise this money elsewhere. During the earnings call, Walter Energy stated that it is exploring potential asset sales and joint ventures and targets to get $250 million in nine months. Given that the company had $171 million of cash and $397 million of working capital at the end of the second quarter, this possible asset sale would significantly enhance liquidity.

However, more asset sales would probably follow. Walter Energy needs money to boost investors' confidence. The company has managed to sell 8.50% senior notes due 2021 back in March, but now the rates would be above 10% for sure. The outlook for met coal prices remains sluggish, and this weighs on the miners' ability to get good rates.

One of the main reasons for poor met coal prices is oversupply. Competitors do not make life easier on this front. BHP Billion (BHP), which got 16.25% of its revenue from coal in the first half of this year, has just opened the Daunia mine in Australia. According to BHP, the mine is expected to bring 4.5 million tons per annum to the market. And there's more to come. BHP plans to open the Caval Ridge mine, which would produce 5.5 million tons per annum of export met coal.

In the face of the perspective of low met coal prices for a prolonged period of time, Walter Energy has to show it can operate profitably to gain access to capital markets. In the second quarter, the U.S. segment of Walter Energy has shown a $37.3 million operating income. It was the Canadian and U.K. operations segment that brought the company down with a $66.3 million operating loss. If Walter Energy could cut costs further or divest non-performing assets, it would be saved.

Right now, the stock is trading at about the company's book value. Chances are it won't get further without progress on either operational or financing fronts.