Hedge Funds Bet on Coal-Mining Failures
Investors Make Trades in Anticipation of Bankruptcies
Hedge funds are betting that some of the largest U.S. coal companies are heading for the financial slag heap.
The coal industry is in a prolonged slump with a long list of causes topped by sluggish demand and competition from cheap natural gas, which have pushed prices to historic lows. Many investors have abandoned the sector. Eight coal-mining companies traded on the New York Stock Exchange are down an average of 29% in the last year. The conditions are ripe for hedge funds that target distressed investments. They are first betting against the stock and debt of mining firms such as Walter Energy Inc., then snapping up the bonds when their prices fall as low as 40 cents on the dollar.HT: Abnormal Returns
The endgame: swapping that debt for controlling shares of the companies if they go bankrupt. Once coal prices rebound, mines and other assets can be sold at a profit.
“People see blood in the water, and that presents an opportunity,” said Ted O’Brien, president at Doyle Trading Consultants LLC. He said he is advising more than a dozen investment firms that specialize in risky debt that have bought or are considering buying coal-company bonds.
So-called vulture funds have used these tactics in other ailing industries, like air travel and paper manufacturing, generating average annual returns of 7.5% from 2011 to 2013, compared with an average of 3.4% for all hedge funds, according to HFR Inc. But an improving economy has left them with few new targets this year, and returns are down. More of the funds are descending on big coal as declining coal prices finally catch up with mining companies that borrowed heavily to spur growth.
Walter Energy is a particular favorite of distressed-debt investors, including Apollo Global Management LLC, Brigade Capital Management LP, Caspian Capital Management and Knighthead Capital Management LLC, people familiar with the matter said....MUCH MORE