Suncoke 7 5/8% debt, maturity 8/2019; Current price: 102; YTM: 7.1%, YTC: 9.2% (August 2014)

SXC is the spin-off of the coking assets of SU.   A nice description of the equity was previously written up on VIC.  While we feel that the equity is now close to fair value, given the partial MLP-ing of the assets, the underfollowed debt is still a very attractive valuation, with significant downside protection, and underfollowed.  Given the dynamics of the debt, it doesn't have great appeal to standard debt investors who are buying up debt based on name recognization, and the drop-down of the assets to an MLP makes the asset coverage / potential cash flow impairment look worse than it is (i.e. JPM downgraded the debt post the announcement of the MLP).  In short, we cannot find much value in debt-land nowadays, but believe that this has an attractive yield and upside.  Total EV is $1.7bn and market cap is $1.1bn.  We believe EV approximates, or is somewhat of a discount, to Replacement Cost

Total Net Debt approximates $650mm, including environmental, compared to EBITDA of approximately $250mm

SXC has what should be a steady earnings model:  They convert coking coal to coke for use in steel refineries.  They are many times co-located with customers, have long term contracts (past 2020) and are take-or-pay.  The problem child is AKS (approximately 15%), but we expect that AKS would continue to operate in bankruptcy with little credit exposure to SXC (pricing is reset yearly, as are SXC coal purchase obligations). SXC also owns coal assets, which we assign little value to.

SXC is contributing 2 coking assets to form an MLP.  They cannot fully convert to an MLP until 2014 due to tax-rules from the spin-off + the bond covenants. Therefore, we believe there is upside that these bonds will be called in 2014, giving holders an 9.2% YTC for < 2 years (will make drop-downs easier, as well as a full conversion to MLP).  The bonds may also be called given their high coupon relative to where a steady company can issue debt (assuming the bond market doesn’t have radical changes)

The MLP subsidiary will be issuing equity, and upstreaming the cash to the HoldCo (where the bonds are located) to pay off senior bank debt.  HoldCo will also hold equity in the MLP OpCo (as well as have significant operating assets).  Though I am simplifying the transactions, essentially bondholders may be better off because significant equity is being issued to repay senior debt, despite the drop-down of assets. The MLP OpCo may also issue debt to buy more assets which may dilute recovery in a big recession.

Another wrinkle is that SXC has said they would like to build a Greenfield coking facility in the US.  While bond-holders shouldn’t be excited about this, we are mollified because US costs are much lower than importing coking coal, which this will be aimed at replacing. In addition, the LTV of the bonds, even if relevered, will still be significantly below 50%.  Unfortunately SXC will likely lever up to build the greenfield asset.  However, as the market has weakened, SXC has downscaled the size and cost of the new build, and we would expect this to continue if the economy continues to weaken. The risk is that they build and finish the asset just as the economy enters another big recession - but this credit will still hold up better than many other industrials that trade at tighter levels.

While the SXC conversion / story has been simplified, and the equity is, as usual, more controversial, we believe that the debt is money good, and a much better return than other industrial / cyclical credits both on a YTM and especially with the upside on YTC.  This is likely because SXC is a new credit and somewhat more complicated.

Note: we own this debt and may buy or sell more at anytime.