US CREDIT-Constellation may rally on debt refinancing

By Karen Brettell

NEW YORK, Aug 22 (Reuters) - Debt protection costs on
Constellation Energy Group Inc (CEG.N) are at all time highs,
but may be poised to fall if the company addresses liquidity
concerns at its upcoming analysts' conference.

The power producer's credit default swaps have weakened
since it said in a quarterly report on August 11 that it had
underestimated by $1.6 billion how much collateral it would be
required to post in the event its credit ratings were cut into
junk territory.

Standard & Poor's and Fitch Ratings both cut Constellation,
the parent of Baltimore Gas & Electric, one notch on the news
to "BBB," the second lowest investment grade, but both have a
stable outlook on the company, indicating an additional
downgrade is not anticipated over the next two years.

Moody's Investors Service has Constellation on review for
downgrade from "Baa1," three levels above junk.

Any rating cut requires the payment of additional
collateral, however a drop into junk rating territory is more
significant as the company is viewed as having a much higher
default risk.

Analysts expect Constellation to shore up liquidity to
protect its investment grade profile, and to this end some
expect the company may make a statement at its analyst
conference later next month.

"Through discussions with all three rating agencies, we
believe Constellation is in active negotiations with the banks
to line up a longer-term, likely two- to three-year, credit
facility to address its liquidity needs," Stephen Levine,
analyst at Barclays Capital said in a report.

"We would expect an announcement of how liquidity will be
firmed up by the August 27 analyst meeting in Baltimore," he
said. Levine changed his recommendation on Constellation's debt
to "marketweight," from "underweight."

The cost to insure Constellation's debt with default swaps
has risen to 196 basis points, or $196,000 per year to insure
$10 million in debt for five years, from 146 basis points
before the statement, according to Markit Intraday.

If additional credit facilities are put in place, the swaps
may rally back to the 170-to-180 basis points area, said
Barclays' Levine.

"Addressing liquidity requirements resulting from sharp
commodity price increases in the commodities portfolio is
important to maintaining ratings," S&P said in a statement.

At the end of July 2008, Constellation had $3.6 billion in
outstanding letters of credit outstanding, up from $1.8 billion
at December 31, 2007, plus approximately $630 million in
commercial paper borrowings, Moody's said.

This debt is backstopped by various committed bank lines of
credit totaling $5.7 billion, of which approximately $1.4
billion are scheduled to expire in December 2008, Moody's
added.

"We think Constellation will get its credit facilities
renewed," Gimme Credit analyst Philip Adams said in a report.
The company "has aggressively worked to shore up its credit
profile as a standalone entity."