Coal miners in the US make it difficult for private equity to cut payouts

Striking miners at an Alabama coal company want better pay and benefits from management, but they are pushing back their case by focusing on the company’s former owners in the past. private equity industry.

Apollo Global Management, Blackstone and KKR were among the former owners that shared the majority of the nearly $800 million in dividends after the company, Warrior Met Coal, was formed following a bankruptcy reorganization in 2016.

The miners’ union argued that those special payments were made at their own expense.

The deadlocked labor situation has drawn attention to “dividend restructuring, in which a portfolio company borrows to pay special dividends to its owners. Three US senators this month sent a letter to Apollo and Blackstone criticizing their record at Warrior, saying they “appear[ed] have prospered like robbers”.

The scrutiny comes at a time when large private equity firms are earning high profits and enjoy high valuations while they emphasize the importance of responsible governance, social and environmental practices.

Warrior produces metallurgical coal used by steel mills in Europe, South America and Asia. Employees in the American Mining Workers union went on strike in April.

Nearly six years ago, Warrior’s predecessor, Walter Energy, filed for bankruptcy protection, citing falling coal prices and high operating costs. Walter wrote in the court papers: “The Debtors have to bear the costs of disabled labor, mainly in the form of Medicaid and pension obligations, as well as unacceptable hourly labor costs. .

Walter’s senior creditors – including Apollo, Blackstone and KKR – conducted a so-called “credit tender”, agreeing to buy its mines in exchange for their debts. The team purchased an additional $200 million in new Warrior stock.

As part of the settlement with the federal bankruptcy court, private equity firms were allowed to refuse previous employment contracts with the union, while the company pension scheme was terminated and was taken over by the US government’s Retirement Guarantee Company. Such moves are typical in corporate bankruptcies.

The cleaned balance sheet and improvement in the coal business quickly paid off for the new owners. Before going public in 2017, Warrior paid them a $190 million cash dividend. A few months later, the company paid a $600 million cash-funded dividend as well as $350 million in debt.

The payouts show a good cash return: at the end of 2017, Warrior’s public equity value was $1.3 billion.

Union officials argue that the payouts to investment groups have drained the company’s financial resources.

“They are vulture capitalists,” said Phil Smith, a spokesman for UMWA, of Warrior’s previous owners. “This company would not have existed if the miners hadn’t had significant pay cuts, health benefits and vacation time when this company went bankrupt.”

The union argues that mine workers suffered a 20% pay cut following the restructuring and also face higher healthcare costs than before.

People close to private investors say that their acquisitions and investments in Warrior have saved jobs, while hourly workers’ annual earnings have increased from $75,000 to nearly $75,000. $100,000 from 2016 to 2021.

They also point out that private equity firms do not have an existing stake in the company. An Apollo executive who remained on the board after its investment ended, Gareth Turner, stepped down last week citing the necessary time commitment.

This year, coal price hit a new high as steel demand recovers from the pandemic. However, Warrior was unable to increase production as it attracted alternative miners. During a November earnings press conference, chief executive Walter Scheller said the company could increase coal production by about 25% if the strike is resolved, but warned of “further disruption to manufacturing and shipping operations” if it continues.

Earlier this month, Warrior announced that it was selling $350 million in new junk bonds to refinance its 2017 debt offering that was used to pay a second shareholder dividend.

US senators Elizabeth Warren and Tammy Baldwin, both Democrats, and Bernie Sanders, an independent, asked in letters for Apollo and Blackstone for information about their involvement at Warrior. Warren, of Massachusetts, recently sponsored legislation that cuts the dividends that investment firms pay to their private equity holders.

Blackstone said the senators’ letter was “fraught with misleading statements and our broader business model is false”. Blackstone said its credit business “worked together to save 1,400 jobs by investing in a bankrupt company during a severe market downturn.”

Apollo said its previous investment in Warrior saved the company’s mining operations from the brink of collapse, allowing it to reduce debt and invest in its business and maintain jobs in Alabama.

“In the span of Apollo’s investment until our final exit in 2019, the company has thrived – its stock price is up, they have a positive relationship with the workforce and represent unions, and employees, who rank among the highest earners in Alabama, receive substantial salaries, Apollo said.

KKR declined to comment.

When asked for comment, Warrior referred the Financial Times to a company website of the strike said: “Our goal throughout the negotiations remained unchanged – to provide employees with a competitive compensation package, while protecting jobs and the long-term viability of the Company. company in a volatile market.”

Coal companies were once active dividend payers. Warrior paid an additional $580 million in special dividends in 2018 and 2019.

“We consider this a fairly high-risk industry. When times are right, these companies can generate a fair amount of cash. When times are bad, cash flow is depressed, said Benjamin Nelson, coal industry analyst at Moody’s.

Warrior’s largest shareholder is currently BlackRock, which holds a 14% stake primarily through passive means, filings show.

Mining workers protested outside BlackRock’s Manhattan headquarters as they continued their strike.

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