BRIEF-Vipshop extends put right exercise period for 1.5 pct convertible senior notes due 2019
* Vipshop extends put right exercise period for 1.50% convertible senior notes due 2019
Overview -- NRG Energy and GenOn Energy have completed their merger, creating the largest independent power producer in the U.S. GenOn is now a subsidiary of NRG of some strategic importance, but GenOn's debt remains nonrecourse to NRG. -- We affirmed our corporate credit rating on NRG at 'BB-', based on consolidated financial measures. -- At the same time, we raised our corporate credit ratings on GenOn and its subsidiaries to 'B' from 'B-', reflecting the nonrecourse position of GenOn and evident optionality of its ownership by NRG. -- We are removing all NRG and GenOn ratings from CreditWatch. The outlook is stable. Rating Action On Dec. 19, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' corporate credit rating on NRG Energy Inc. and removed the ratings from CreditWatch with negative implications, where we placed them on July 23, 2012. At the same time, we raised GenOn Energy Inc.'s ratings to 'B' from 'B-' and removed them from CreditWatch positive, where we placed them on July 23, 2012. Rationale The rating actions follow the closing of NRG's merger with GenOn. Following the exchange, NRG's existing shareholders own about 71% of the pro forma company. NRG had about $11.3 billion of total debt as of Sept. 30, 2012. Recourse corporate debt was about $8.05 billion. GenOn has about $3.7 billion of outstanding debt pro forma after paying off the term loan B, but we impute about $1.8 billion in additional debt into our financial measures to reflect operating lease liabilities at key subsidiaries GenOn MidAtlantic LLC and GenOn REMA LLC. A wholly owned excluded subsidiary of NRG has merged with and into GenOn, with GenOn continuing as the surviving corporation in the merger and becoming a wholly owned subsidiary of NRG. We note that GenOn has merged with NRG as an excluded project subsidiary largely because GenOn's holding company notes currently contain more restrictive covenants than NRG's. We consider the consolidated entity to have a "fair" business risk profile and an "aggressive" financial risk profile, which when factoring in our view that the company will have strong positive free cash flow over the next two to three years and above-average liquidity, results in a 'BB-' rating for NRG. We rate GenOn lower than NRG noting its higher stand-alone business and financial risk profiles than NRG and the ownership structure in the NRG hierarchy that would enable NRG to walk away from the heavily coal-based GenOn unit if warranted. GenOn has become an excluded subsidiary under NRG's credit documents. NRG will not provide GenOn enhancements such as additional liens, mortgages, and/or guarantees and also has no obligation to commit cash to GenOn. GenOn's cash balances that remain after paydown of senior secured debt at GenOn will stay at GenOn. A shared-services agreement between both companies is expected to preserve all of the cash flow benefits of a merged structure, enabling NRG to capture synergies at the parent level even as the two companies operate at arm's length. At the same time, GenOn's indentures and credit agreement did not envision a "parent" so there are no cross-defaults to NRG's debt, either. NRG and GenOn also cannot co-mingle cash as GenOn is still subject to its debt covenants and restricted payment restrictions. Although GenOn's debt will remain nonrecourse with respect to NRG's first-lien facilities, from an analytical perspective, we have consolidated GenOn's debt when assessing the company because we believe GenOn to be strategically important to NRG for now. We raised GenOn's corporate rating by one notch to 'B'. The upgrade reflects that the company benefits from optimization of its portfolio through scope and scale, lower operating and maintenance expenses, and the extension of a secured revolving credit facility (about $500 million) from NRG. While GenOn has repaid its $686 million term loan and improved its stand-alone financial measures, it has used to pay down the term loan and also reduced liquidity further by terminating the $788 million revolving facility. Finally, we have not equalized GenOn's ratings with NRG's to underscore the nonrecourse optionality NRG retains and its intention to operate the two businesses at arm's length. Over time, if we see a deeper relationship between the two units that could stand in times of stress, a lesser separation would follow. Our "fair" business risk profile on NRG (which now includes GenOn's assets) mostly reflects the company's fundamental exposure to volatile commodity markets, balanced by a hedging program and ongoing efforts by the company to reduce the influence of natural gas price volatility on its cash flows. Although GenOn's stand-alone business risk profile was weaker than that of NRG, offsetting factors include benefits of wide geographic, fuel type, and technology diversity and scale that provide a power generation platform for NRG's retail business to expand in the Northeast with its large load centers and more stable capacity market revenues. The following strengths support the combined credit quality at the 'BB-' level: -- Very large scale. The combined company has a capacity of more than 47 gigawatts and offers geographical diversity and scale across several markets, providing it the opportunity to participate in PJM Interconnection, California, Electric Reliability Council of Texas (ERCOT), and New England Power Pool--the largest deregulated power markets in the U.S. -- Dispatch diversity. The combination has an improved dispatch profile with a better mix of base load, mid-merit, and peaking facilities in regions where it owns generation, with the ability to better capitalize on wholesale market movements. -- Economies of scale. Cost-reduction through merger synergies will result in a better cost structure and improve its position in competitive electricity commodity markets. Management estimates that the pro forma combination will result in $300 million in annual savings, and we estimate merger savings will be a significant 35% of GenOn's EBITDA levels. We have assumed a lower $225 million to $250 million of cost improvements in our analysis. -- Each company still has excess cash on hand and the stand-alone NRG continues to generate free cash flow, even under our natural gas, power, and capacity pricing assumptions. Over the next two years, we expect expanding heat rates in ERCOT, improved New York capacity prices, and higher heat rates in the West to result in higher power market prices in NRG's market than the low levels seen this year due to lower demand and depressed natural gas prices. We also expect The Public Utilities Commission of Texas's additional market design changes to benefit NRG's cash flows in that region. Market heat rates have responded to the systemwide price caps increase to $5,000 per megawatt-hour (MWh) (starting June 1, 2013), $7,000 per MWh in 2014, and $9,000 per MWh in 2015 (from $3,000 per MWh in January 2012; raised to $4,500 per MWh in July 2012). Other upside opportunities include retail expansion in the Northeast, future repowering projects in New York and California, and monetization of the solar power portfolio in which NRG has infused about $1.5 billion of equity to date. Still, with all the potential upside, risks to the long-term pro forma margins remain from a potential lengthy suppression in natural gas prices and differences in power prices throughout the Mid-Atlantic region, reduction in capacity revenues from additional aged coal plant retirements at GenOn, or contraction in retail margins in ERCOT. We also believe weather-driven demand remains weak, and that the commodity environment is uncertain, which had resulted in increasing pressure on NRG's financial profile. Our negative outlook on NRG earlier in the year reflected the potential for a negative rating action given two weak quarters as natural gas prices plunged and the company's weakening financial measures. We lowered GenOn's rating earlier this year due to the same cash flow risk reasons. However, the second and third quarters ended strong, and natural gas prices seem to be edging up from low 2012 levels. NRG has generated free cash flow before strategic growth investments of about $806 million year-to-date through September 2012. NRG's hedging program has bolstered cash flow protection measures in the past two years and has allowed the company to maintain a relatively stronger financial profile compared with other independent power producers. Still, while NRG has aggressively hedged its base-load generation into 2015, these hedges are at significantly lower prices, resulting in a declining EBITDA profile for its wholesale business. In our forecast, we stress market heat rates and gas prices. We assume natural gas prices remain low ($3.00 and $3.50 per million Btu in 2013 and 2014, respectively, and growing with inflation thereafter) and market heat rates fall by about 1,000 Btu per kilowatt-hour (kWh) than current implied forward heat rates. We expect cash flow from operations to interest of about 2.0x and cash flow to debt of between 12.5% to 13.5% in the 2012-2014 period (we consider Cash flow from operations instead of funds from operations for NRG as we record some distributions, such as the ones from its solar portfolio, in its working capital swings). Important from the financial risk profile perspective is that the company remains free cash flow positive under our price sensitivities, with free cash flow estimates at a low of $200 million in 2012, but rising to about $900 million by 2014. Debt to EBITDA is high for an aggressive financial profile, but will remain under 5.75x through 2014, even under Standard & Poor's sensitivity. Notably, leverage does not decline as much as in earlier years because of the elimination of the 50% excess cash flow sweep as part of the refinancing of NRG's first-lien facilities. Although risk practices are largely prudent, we believe execution risks are still meaningful, given the setback NRG had in its retail operations in Texas last summer because of extended hot weather. We currently score management as "fair" under our new management and governance criteria. A reasonable mix of executives from both companies will run the new conglomerate with strategy and operations run by leadership from the former NRG side and finance functions by leadership from the GenOn side. Liquidity We consider NRG's liquidity to be "adequate." The company has abundant liquidity for its operations and growth investments over the next 12 to 24 months, even if moderate, unforeseen EBITDA declines occur. As of Sept. 30, 2012, NRG had about $1.6 billion of cash on hand and $1.1 billion available under its bank and letter of credit facilities. Similarly, as of Sept. 30, 2012, GenOn has about $1.9 billion of cash on hand. Management has used cash-on-hand to retire the outstanding $686 million term loan at GenOn, but the combination still has more than $2.8 billion of cash available on hand at various entities. Under the terms of GenOn Energy Holdings Inc.'s debt, about $2.5 billion in senior unsecured notes has a change-of-control acceleration event at the option of the lenders. The merger may require refinancing or repricing of this debt. The combination has cash-on-hand and a $1 billion bridge loan to address additional liquidity requirements if lenders exercise the put option. However, we believe that risk is low given where the debt is currently trading. GenOn's $788 million revolving credit facility has been eliminated. NRG has replaced the bank revolver and has provided GenOn a $500 million secured revolver. The revolver is not funded, but is backstopped by NRG's $2.3 billion revolver and is meant to be mostly used to provide letters of credit for trading collateral needs. As of Dec. 14, 2012, there was about $280 million of letters of credit issued under this new revolver. We will continue to monitor if this reduced level of credit facilities is appropriate for the size of the business. We believe sources would substantially exceed uses even with a 20% decline in EBITDA. NRG's ability to use "right-way risk" asset pledges to collateralize counterparties in lieu of cash or letters of credit significantly mitigates liquidity risks when commodity prices rise. The EBITDA cushion in NRG's covenants is about 25%. Management has been prudent about liquidity, having maintained substantial cash balances in addition to unused bank lines and right-way-risk facilities during the past two years. Overall, NRG's ratio of sources to uses is strong at about 1.75x over the next 12 months (includes all expected capital spending), substantially more than the 1.2x required for the "adequate" category. Yet, we consider NRG's liquidity position as adequate because of more qualitative factors such as its average standing in credit markets. The company's credit default swap spreads have generally widened as gas prices have declined. In July 2011, NRG replaced its senior credit facility, consisting of its term loan facility, revolving credit facility, and funded letter of credit facility, with a new senior secured facility that included a $2.3 billion revolver maturing July 2016 and $1.6 billion term loan maturing July 2018. Recovery analysis There are no changes to the recovery scores at both entities. Please see latest recovery reports on NRG and GenOn published June 28, 2012 Dec. 16, 2011, respectively. An updated GenOn stand-alone recovery analysis will be published shortly. We note that GenOn's unsecured debt rating recovery score of 4 did not change with the retirement of the term loan and elimination of the revolver. The reason for this is two-fold: we performed our recovery analysis on a discrete asset basis and have reduced the $-per-kilowatt values for coal plants given the low natural gas prices; and, GenOn has announced several additional coal plant retirements, thus reducing the enterprise valuation assessment. Outlook The stable outlook reflects our view that the business risk profile, financial risk profile, free cash flow, and liquidity are not likely to change from our expectations over the next two years. There is no upside potential for NRG's ratings through 2014 given that we expect the company's consolidated cash flow from operations to debt ratio to be at the weaker end for the rated level, at about 12% to 13% through 2013. We will likely lower NRG's ratings if its cash flow to debt measures decline consistently below 12%. Still, free operating cash flow to debt and discretionary cash flow to debt ratios remain strong, at about 7% and 6%, respectively, indicating the large free cash flow generation potential, which will allow the company to internally fund both its capital spending and distributions even under our price deck. We believe GenOn's operations are strategically important to NRG, but will maintain the rating differential because NRG retains the optionality of walking away from GenOn's nonrecourse debt. Over time, if we see a deeper relationship between the two units that could stand in times of stress, a lesser separation would follow. Ratings would also be affected--with NRG's likely declining--if NRG extends support to GenOn if its credit quality deteriorates. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Credit FAQ: Standard & Poor's New Approach To Speculative-Grade Ratings, May 13, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Off CreditWatch NRG Energy Inc. To From Corporate Credit Rating BB-/Stable/-- BB-/Watch Neg/-- Senior Secured BB+ BB+/Watch Neg Recovery Rating 1 1 Senior Unsecured BB- BB-/Watch Neg Recovery Rating 3 3 Ratings Raised; Off CreditWatch GenOn Energy Inc. GenOn Americas LLC GenOn REMA LLC GenOn Energy Holdings Inc. Corporate Credit Rating B/Stable/-- B-/Watch Pos/-- GenOn Energy Inc. Senior Unsecured B B-/Watch Pos Recovery Rating 4 4 GenOn Americas LLC Senior Unsecured BB- B+/Watch Pos Recovery Rating 1 1 GenOn Mid-Atlantic LLC Senior Secured BB- B+/Watch Pos Recovery Rating 1 1 Ratings Affirmed, Off Watch; New Recovery Rating GenOn REMA LLC Senior Secured B+ B+/Watch Pos Recovery Rating 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
* Vipshop extends put right exercise period for 1.50% convertible senior notes due 2019
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