In January, as declining coal prices took a toll on the industry, Peabody began negotiating with unsecured bondholders about a restructuring, its chief financial officer, Amy Schwetz, said in a recently unsealed deposition.
Aurelius Managing Director Dan Gropper proposed an accounting change, Schwetz testified. He said that if the company’s auditors ever expressed doubt about its ability to continue as a “going concern,” Peabody should reclassify its long-term debt as a current liability.
According to Citibank’s complaint, the company proceeded to do just that, even while knowing it would entail a waterfall of calculations that would mean a bonanza for the two hedge funds and other unsecured lenders in bankruptcy.
Essentially, the accounting change reduced Peabody’s net assets on paper, which in turn triggered a loan provision that Citi and other secured lenders say vaporized $1 billion of their collateral. Those assets instead went into a pool for unsecured lenders such as Aurelius and Elliott.
Expert Witness
Neither side disputes that the collateral was shifted. At issue is whether accounting rules mandated the reclassification. The Citi lenders presented an expert witness to say the change wasn’t required under generally accepted accounting principles. Peabody deployed its own expert to dispute that.
Bartov, the NYU professor, said that the decision to reclassify long-term debt is complex and depends on many factors.
Why would Peabody want to aid the two hedge funds, as alleged? Citi claims Aurelius had offered the company a smoother bankruptcy and would help it exit the reorganization with less secured debt. It also says the coal company was aware the hedge funds were a powerful source of future financing.
Pot, Kettle
Peabody’s response is that it didn’t have a dog in the fight. Whatever the outcome, it “will not reduce Peabody’s overall debt and instead will only dictate value allocation among two creditor constituencies,” it said.