Cheapest Bonds Plummet as Creditors Mull NWR Lifeline

By Krystof Chamonikolas  

Photographer: Martin Divisek/Bloomberg

A bulldozer shifts coal around a storage area at OKD AS's CSM coal mine, operated by... Read More

Investors are dumping the world’s cheapest euro-denominated corporate bonds as New World Resources Plc seeks a deal with creditors this week to avert bankruptcy.
The Czech coal company’s unsecured debt due January 2021, which is in default after a missed coupon payment in July, fell to a record 8.5 cents on the euro two days ago. The 275 million-euro ($363 million) Eurobond traded at 12 cents today by 9:57 a.m. in Prague, the cheapest of the 453 notes in the Bloomberg Euro High-Yield Corporate Bond Index, followed by NWR’s 500 million-euro secured May 2018 note, at 64.4 cents.
Bondholders meeting in London tomorrow will probably approve the management’s restructuring plan as its rejection would spur an immediate insolvency and
may leave some creditors with nothing, NWR Chief Financial Officer Marek Jelinek said in an Aug. 21 interview. The company may keep losing money even with a revamp as coal prices are falling for a third year amid oversupply, Moody’s Investors Service said on the same day.
“The market expects the new instruments coming out of the restructuring, if it happens, to trade at a big discount,” Lutz Roehmeyer, a money manager overseeing $1.1 billion of debt in emerging markets at LBB Invest in Berlin, said by phone on Aug. 28. “Even a restructured NWR is unattractive as the business outlook doesn’t bode well for the company’s future.”

Debt Mountain

LBB has never owned NWR bonds and doesn’t plan to buy any, having sold out of its stock in January, according to Roehmeyer.
NWR won’t comment on the pricing of its bonds and Moody’s concern, Joe Cook, the Amsterdam-registered company’s spokesman in Prague, said in response to e-mailed questions yesterday.
The biggest Czech producer of coking coal is grappling with a total debt of 810 million euros ($1.1 billion), or 29 times its market capitalization, after falling demand from steelmakers left the company with seven consecutive quarterly losses. The miner, which has been cutting costs and sold assets last year to raise cash, requested creditor protection in the U.S. in July.
NWR is trying to repurchase its 2021 and 2018 bonds for a mixture of 90 million euros in cash, new senior secured notes of 300 million euros, new convertible notes of 150 million euros and new contingent value rights of 35 million euros, according to the restructuring proposal. The company also expects net proceeds of 144 million euros from an equity issue that would boost the number of its shares 25 times.

Vote Contingencies

The plan, which would cut NWR’s debt to 500 million euros and was approved at a shareholder meeting on Aug. 20, needs the backing tomorrow of 75 percent of those holders of each of the two bonds taking part in the voting, according to Jelinek. If the plan fails, the secured debt owners will take over the company’s assets and the recoveries for some creditors will be “very low or possibly even zero,” he said in the Aug. 21 phone interview.
Falling steel production worldwide sent the benchmark price of coking coal for 2015 delivery in China to $121.5 per metric ton this week from $154 at the end of last year and more than $200 in 2012, the last year NWR posted a profit.
“The restructuring is based on a number of assumptions and one of those assumptions is that the market will recover,” said Jelinek. “I don’t know when and to what extent, but it seems clear that at least from the coking-coal side it will recover.”
Rohan Choudhary at Moelis & Co., the financial adviser to a committee of NWR bondholders, and Sean Lacey at Freshfields Bruckhaus Deringer LLP, the legal adviser to the creditor group, did not respond to e-mailed questions from Bloomberg yesterday.

‘Considerable Challenges’

Moody’s downgraded NWR’s corporate family rating to Ca, a step above default, from Caa3 in a statement on Aug. 21, citing the missed coupon payment and “an increased likelihood of default for the whole capital structure given the considerable challenges the company is facing.”
Holders of NWR’s 2021 notes lost 9.8 percent this month through yesterday and 53 percent this year, the worst slump after Portugal’s Banco Espirito Santo SA in the Bloomberg index of euro-denominated corporate debt. The stock fell 8.1 percent today to 2.85 koruna, extending this year’s drop to 88 percent and valuing the company at 781 million koruna ($37 million).
“Investors have completely lost faith in the company and its management,” Peter Elek, a Budapest-based money manager at Dialog Befektetesi Alapkezelo Zrt., which sold out of NWR bonds in July, said by e-mail on Aug. 27. “We’ve had enough of NWR.”