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Westmoreland Coal Company: Emerges From Bankruptcy

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Formerly public coal operator Westmoreland Coal Company, which also owns subsidiary Oxford Mining Company, has emerged from bankruptcy with a (slightly) new name – Westmoreland Mining LLC and new ownership. At the time of filing Chapter 11, Westmoreland Coal had a reported $1.4bn in debt. In bankruptcy there has been a debt for equity swap with senior lenders who have now become the new owners of mines and other facilities in the U.S. and Canada. We are not yet clear on what the new balance sheet will look like, but will provide details in the future.

Two public BDCs have exposure to Westmoreland and Oxford Mining respectively: BlackRock Capital (BKCC) and Medley Capital (MCC). The former has $26.6mn invested in senior secured debt, which was most recently valued at $5.3mn. The loan was placed on non accrual in the IVQ 2018, after the company filed Chapter 11 in October. However, the company was on our Watch List since IQ 2018. We now believe the debt will be converted to equity and the value will be known in the IQ 2019 results. We expect similar treatment will occur for MCC’s $19.7mn advance to Oxford Mining, which was valued at $6.9mn, a two-thirds discount, at 12/31/2018.  In addition, at September 30, 2018 sister BDC Sierra Income had nearly $20mn in the same debt facility. Although Sierra Income has not yet reported, we expect the BDC still holds its debt. That brings total BDC exposure at cost at over $60mn. If we’re right and the three BDCs are involved in the agreed-upon debt for equity swap no income from these assets can be expected. When current, these loans were generating in excess of $7.5mn of annual investment income. Moreover, the managers of the BDCs may or may not write off some of their exposure in the IQ 2019 results.

Going forward – and whatever the state of Westmoreland Mining LLC’s balance sheet – the future of the business remains in question given the secular changes underway in the coal sector. We will retain Westmoreland Mining on our Watch List regardless of BDC valuation of its new security. While this story is not yet over, the BDC Credit Reporter cannot understand why BKCC, MCC and Sierra would take any position at any level of the balance sheet iu a company in such a cyclical industry and whose decline has been a matter of public record for many years. All 3 BDCs have been involved with the bankrupt entity since late 2014. Yet as early as mid-2014, the public company’s stock – as shown in this article – was already in sharp decline and debt had tripled from 2013 and the business was generating negative operating income.  Note that no other BDC was involved during that period.

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