US CREDIT-Entergy credit default swaps may widen on spinoff

By Karen Brettell

NEW YORK, May 16 (Reuters) - Credit default swaps on
Entergy Corp (ETR.N: Quote, Profile, Research, Stock Buzz) may widen significantly if the energy
company completes plans to spin off some of its assets into a
new company.

Entergy said late last year it plans to transfer six
nuclear power plants into a new publicly traded company, Enexus
Energy Corp, hoping to capitalize on the plants' low operating
costs and carbon-free emissions.

The company said in a regulatory filing this week it plans
to transfer $3 billion in debt to the new company.

Under rules of the credit default swaps, this means that
the contracts will likely be transferred from Entergy from
Enexus, a process known as succession. And the new company is
expected to have a much weaker credit profile than Entergy,
analysts said.

"It looks pretty certain now that there will be a
succession event, but even that is not a lock at the moment,"
CreditSights analysts said in a report.

"It also looks more possible that credit default swap
holders could actually end up 100 percent at a small, below
investment-grade merchant nuclear company with negative equity,
clearly not a thrilling prospect," they said.

Credit default swaps on Entergy are trading at around 220
basis points, or $220,000 per year for five years to insure $10
million in debt, according to broker Phoenix Partners Group.

The price indicates the market is pricing in a range of
uncertainties, including whether the spin off will be
completed, or if its time frame will extend beyond the planned
third quarter of 2008, JPMorgan analysts said in a report.

It also indicates that changes may be made to the amount of
debt planned for the debt exchange between the two companies,
they said.

If the deal is completed and the credit default swaps are
transferred to Enexus they are likely to trade wider than 300
basis points, analysts said.

SUCCESSION

The amount of debt that is ultimately transferred to Enexus
is critical because of rules governing debt exchanges in the
securities.

If more than 75 percent of the debt underlying the credit
default swaps is transferred to a new company, the credit
default swap succeeds entirely to that company.

If between 25 percent and 75 percent of debt underlying the
swaps is transferred to a new entity, the contracts are split
evenly between the two businesses.

At current levels, the swaps indicate an even split.

With no certainty on how much debt will ultimately
transferred, and no expectation that this issue will become
clarified until the spinoff is near completion, Entergy's swaps
remain risky, analysts said.

"We remain on the dock of the bay, without any enthusiasm
for owning bonds or credit default swaps at any level in the
capital structure," CreditSights said.