When leading U.S. coal miner Peabody Energy Corp. emerges from bankruptcy next month, a group of seven investment funds could reap hundreds of millions of dollars in gains from an unusual sale of discounted company stock.
Six hedge funds and a state investment fund together own about half of the company's unsecured bonds, according to a January disclosure statement from Peabody. They used that leverage to gain access to a private placement of company stock, which has become surprisingly valuable amid an unexpected coal resurgence.
The exclusive offering for institutional investors will be challenged in bankruptcy hearings starting Thursday by a group of individual investors who were shut out.
Those investors - who said in court filings that they own between 5 and 7 percent of the unsecured bonds - will argue in U.S. Bankruptcy Court in St. Louis that Peabody's reorganization plan should be rejected because it violates a bankruptcy statute requiring equal treatment for owners of the same securities.
"This is absolutely theft from a small group of people who are powerless," said Edward Hindelang, 69, a longtime investor in Peabody's stock who started buying its bonds when clouds gathered over the coal sector in 2015.
St. Louis-based Peabody declined to comment, but has argued in court that its Chapter 11 restructuring plan maximizes value for all investors and creditors. Extra benefits for major investors reflect their outsized role in negotiating and financing the company's bankruptcy exit, the company has said in court filings.
Two of the hedge funds - Elliott Management and Aurelius Capital Management - played a pivotal role cutting the deal. Elliott and Aurelius gained negotiating clout by threatening a protracted legal challenge aimed at using an accounting change to strip $1 billion in collateral from a loan arranged by Citibank.
Elliott, Aurelius and Citibank declined to comment.
Individual investors are being shut out of a private placement of $750 million in newly minted Peabody preferred stock - at a 35 percent discount to the company's estimated valuation. The sale of stock, which comes with attractive dividends and other benefits, is only open to institutional investors who hold Peabody bonds, including the seven funds.
Individual investors can, however, buy stock at a discount of at least 45 percent in a separate $750 million common stock offering, which is also open to major funds.