The cost of five-year credit protection on Michigan utility CMS Energy doubled last week as the company's USD450 million bank facility was set to expire. Five-year protection blew out to 1,100-1,350 basis points Wednesday, from 550-650bps earlier in the week, with demand for protection coming from the hedge fund community. The default-swap curve also inverted, with mid-market one and a half-year protection at 1,300bps, indicating short-term concern for the company. It is in the process of restating earnings from 2000 and 2001 to eliminate revenue generated from so-called round-trip trades, which occur when a company buys and sells electricity at the same price to artificially inflate trading volumes. "That's inflated their revenues by something like USD4 billion. It's an investor confidence issue," said one trader. But he added that among utilities, CMS does not rely on trading revenues as much as other names such as Dynegy.
The spreads also blow out because of recent reviews by the three rating agencies, with Moody's Investors Service downgrading it from Ba3 to B3 and putting it on watch for a further downgrade last week, Fitch Ratings put its BB plus rating on negative watch last week and Standard & Poor's put its BB rating on negative credit watch May 24.
CMS ran into trouble because its auditor, Andersen, said it would be unable to verify the company's restated earnings once they are completed because of its own well-documented troubles over Enron. That's left the company in the position of needing to extend its bank facility or negotiate a new one without audited financial statements, said Karen Anderson, an analyst at Fitch Ratings in Chicago. "The last seven months in this industry have been very difficult and people are very wary when any type of negative news occurs," she said, adding, "we will all be watching to see what happens [with the bank facility]."
