Hedge funds target distressed coal companies

"Hedge funds are betting that some of the largest U.S. coal companies are heading for the financial slag heap," report Timothy Puko, Matt Wirz and Matt Jarzemsky of The Wall Street Journal. (WSJ illustration)

"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," the reporters write. "Many investors have abandoned the sector. Eight coal-mining companies traded on the New York Stock Exchange are down an average of 29 percent 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."

Once the hedge funds become the companies' bankers, they can exchange that debt "for controlling shares of the companies if they go bankrupt," the writers explain. "Once coal prices rebound, mines and other assets can be sold at a profit. . . Alpha Natural Resources Inc. and Arch Coal Inc. have also seen heavy interest from distressed-debt buyers, people with knowledge of the matter said. Along with Walter Energy, the companies have a combined debt of $12.2 billion, according to Morningstar."