By Karen Brettell
NEW YORK, Oct 1 (Reuters) - Debt protection costs for
utility companies and other power producers are likely to
remain elevated until logjams in the credit markets are
cleared, as market seizures are raising concerns over the
companies' access to capital.
Credit default swaps on power companies were among the
weakest performers on Wednesday, led by a 54 percent move wider
in swaps on Dominion Energy (D.N) to around 102 basis points.
The volatility came after Reliant Energy (RRI.N) on Monday
cut its profit forecast and said it had obtained $1 billion of
new financing to replace a credit facility, which sent its
shares down as much as 51 percent on Tuesday. For details, see
[ID:nN30440144]
"There's lot of ways to speculate (on market moves), but
what it fundamentally gets to is frozen liquidity," said Gimme
Credit analyst Philip Adams.
American Electric Power Co's (AEP.N) swaps also weakened 29
percent on Wednesday to 81 basis points, or $81,000 per year
for five years to insure $10 million in debt. FirstEnergy
Corp's (FE.N) swaps weakened 23 percent to 102 basis points,
Markit data shows.
"Credit market difficulties are starting to have some
spillover. It's not just banks, but its companies and
industries that depend on functioning financial markets," Adams
said.
Reticence to lend to even highly-rated borrowers is making
it harder for companies to raise capital and when they do the
cost of the debt is high, especially for firms considered more
risky.
Reliant, which is rated below investment grade, said it had
secured a $650 million senior secured loan with Goldman Sachs
at Libor +4.5 percent and another $350 million of convertible
preferred debt with First Reserve at an interest rate of 14
percent.
The new capital replaces a $300 million credit facility
that Reliant had with Merrill Lynch that enabled the power
producer to avoid posting millions of dollars in collateral.
"The company said its decision to end the Merrill Lynch
$300 million hedging facility was completely mutual,"
CreditSights analyst Andy DeVries said in a report on
Wednesday.
"We think it has more to do with Reliant knowing it was
going to trip the earnings before interest, taxes, depreciation
and amortization covenants in the facility owing to the weak
results in the Retail segment," he said.
DeVries is "underweight" Reliant's bonds and credit default
swaps, citing concerns about the company's earnings outlook.
OUTLOOK
If credit markets stabilize, as is hoped if the government
passes a $700 billion bailout bill for the financial industry,
swaps on utility companies should stabilize near term, though
debt needs through the coming years is likely to hurt their
credit profiles.
"Utilities, if they're the right ratings and the right kind
of paper, are still kind of perceived as being the safe haven,
and near term I wouldn't disagree," said Gimme Credit's Adams.
"My utility outlook for the rest of the decade, though, is
that every one of them has capex requirements well in excess of
their internal cash generation," he said. "Most of them are
going to be net borrowers over the next couple of years, so
that if they don't get the right kind of rate treatment I would
expect them to slowly deteriorate in credit quality."
Other power producers which generate positive cash flows
may fare better, though risks to creditors are that they use
cash proceeds to pump up their stock price at the expense of
debt holders, Adams said.
(Additional reporting by Matt Daily in New York)
