ETF Trends
ETF Trends

The Market Vectors-Coal ETF (NYSEArca: KOL) is down 13% over the past, extending a trail of woe that has seen the largest coal exchange traded fund tumble nearly 30% over the past two years.

KOL’s struggles are encouraging some hedge funds to short not only shares of companies held by the ETF, but also short distressed debt issued by several of KOL’s most embattled constituents. Hedge funds are betting against debt issued by the likes of Walter Energy (NYSE: WLT), shares of which are down 80.3% this year, and turning around going long coal company bonds for pennies on the dollar.

“The endgame: swapping that debt for controlling shares of the companies if they go bankrupt. Once coal prices rebound, mines and other assets can be sold at a profit,” report Timothy Puko, Matt Wirz and Matt Jarzemsky for the Wall Street Journal.

Walter is emblematic of the coal industry’s struggles. The stock currently trades just over $3, a long way from its triple-digit price tag in July 2011 when hedge fund Audley Capital said shares of Walter Energy were worth $240, more than double where the stock traded at the time that audacious claim was made. [Investors Stick by Coal ETF]

Hedge funds such as Brigade Capital Management LP, Caspian Capital Management and Knighthead Capital Management LLC have feaster on Walter bonds, the Journal reported, citing unidentified sources familiar with the matter.

Alpha Natural Resources (NYSE: ANR) and Arch Coal (NYSE: ACI), which are down 64% and 39%, respectively, this year, are also favorite targets of hedge funds specializing in distressed debt. Those companies both trade below $3.

KOL and its holdings took a hit after demand for metallurgical coal – coal used in production of metals like steel – faltered on slowing growth in China. In May, coal stocks weakened after Stanford University became the first major university to divest from fossil fuel producers perceived as major polluters. [Coal ETF Looks for Post-Election Help]

Arch, Alpha Natural and Walter have bled so much of their market values that the trio combines for barely over 2% of KOL’s weight.

Speculation that some U.S. coal companies, including the KOL holdings mentioned here, are financially imperiled to the point that they will not be in business in a few years comes as electric utilities across the U.S. are reportedly pressing railroad operators to deliver more coal before winter temperatures drop even further.

Market Vectors-Coal ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.