E Walter Energy: Beware The Risk As Evidenced By The Company's Deeply Distressed Bond Prices

Bondholders Are the Key Investors Now

One way in which the existing stock could be maintained would be to massively dilute the company with billions of new shares issued to the unsecured bondholders in exchange for their bonds. That way, there's no bankruptcy, but the dilution would be so severe that the existing stockholders might be left holding shares at $0.10 instead of $3 bucks, thereby giving control of the company to one or more classes of bondholders. The unsecured bondholders are not necessarily the group that would get the vast majority of equity, I simply cite this as an example. Bondholders more senior in the capital structure than the unsecured holders could possibly get newly issued shares and/or warrants without even giving up their debt claims.

Conclusion:

The key point here is that investors in Walter Energy's stock are swimming with the sharks now and should be careful. The type of investors who are trading the bonds are giant hedge funds like Apollo Global Management. Professional investors are also now active in Alpha Natural Resources (ANR) and Arch Coal (ACI). Large hedge funds have access to far greater legal and financial firepower than retail investors. Therefore the stocks of many of the coal companies, especially Walter Energy, will remain quite volatile for an extended period. The coal stocks are for professional traders and investors, not retail investors looking for a quick double from 3 bucks. 

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Adem Tumerkan 4 years ago Contributor's comment

Good critical thinking for investors here.