The world’s largest asset manager has tapered its coal investments as waves of financial distress crash across the industry.
BlackRock Inc. cut its holdings in Walter Energy Inc. to 2.1 percent of the company’s common shares, according to a filing with securities regulators last week. In January 2014, it held 5.8 percent. Birmingham, Ala.-based Walter filed for bankruptcy on Wednesday.
BlackRock also slashed its position in Alpha Natural Resources Inc. to 1.8 percent of the company, according to a filing last week. In January 2012, it held 12 percent of shares. Bristol, Va.-based Alpha is contemplating bankruptcy, and yesterday it was removed from the New York Stock Exchange.
BlackRock handles $4.72 trillion for its clients, making it a presence in virtually every major company in the world. For years, it has been among the largest owners of stock in U.S. coal firms.
"I guess that what they’re seeing is that U.S. coal producers have lost a huge amount of value in the last couple years. And they don’t see that turning around," said Geoffrey Heal, a professor of economics at Columbia Business School.
Conditions in the coal industry have many investors running for the exits. Coal prices are foundering due to global oversupply, with no clear end in sight. U.S. firms are buckling under billions of dollars in debt and only a thin cash stream to keep business going (EnergyWire, May 28).
Stock prices have plunged, bringing some of King Coal’s royalty under $1 per share. Bond prices are going haywire as investors try to figure out which companies can be saved from the brink of bankruptcy.
Walter becomes the third major U.S. coal company to file for Chapter 11 in the past two years. About three dozen companies have filed over the past three years, according to SNL Financial, an intelligence firm.
"Walter’s unsecured bonds were trading at like 5 cents on the dollar over the last month, so everybody kind of knew it was coming," said Spencer Cutter, a senior credit analyst with Bloomberg Intelligence.
Prices that low indicate bondholders don’t expect to salvage much in a bankruptcy, he said.
"So now everybody’s wondering, what’s the next shoe that’s going to drop?" he said. "If you look at how the bonds are trading on the market, they’re saying it’s either Arch Coal or Alpha Natural Resources."
BlackRock has chopped its Arch investment to 1.8 percent, according to a filing last week. As recently as February, it held 8.9 percent of Arch’s shares. Arch was the second-largest coal producer in the United States in 2013, with 13.2 percent of national output.
Too big to avoid coal
Coal investors now have to decide whether they want to see companies through the restructuring process, or whether they’ve had enough.
For an investor of BlackRock’s size, that is no trivial question. It’s one of the few investors in the world — along with pensions, insurance firms and sovereign wealth funds — that have to place trillions of dollars in investments.
"Universal owners" like BlackRock have so much cash that they have to invest in nearly every major company in the world, including in U.S. coal, Heal said.
"We’re just so big, we have to buy it," he said by way of characterization. "It’s only in really exceptional places that we avoid purchasing a prominent stock."
BlackRock’s moves come as major U.S. coal companies are seeing a shakeup in their ownership. As some conservative investors sell out, hedge funds and other "vulture investors" are looking for opportunities to make money through a bankruptcy or a long-shot recovery in the coal markets.
On Wall Street, many analysts say the global coal sector has to suffer a one- or two-year crunch to adjust to the new market reality. In the long term, they say, coal will have a smaller but stable share of energy demand.
That’s why analysts think some companies, such as St. Louis-based Peabody Energy Inc., are more likely to survive the market storm.
BlackRock reported in January that it held 17.9 million shares of Peabody, good for 6.6 percent of the company. That is down from the nearly 30 million shares — and 11.1 percent — it held in January 2012.