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Derivatives

FirstEnergy Protection In Demand

Five-year credit protection on U.S. power distributor FirstEnergy popped last week after a U.S./Canadian task force blamed the corporate for the Aug. 14 blackout. Last Wednesday protection on the name widened 10 basis points to 100bps, before settling back in around 95ps, according to a trader. Movement came as bond holders sought protection on the corporate, with dealers also showing interest in selling swaps on the name, he said.

Considering potential liabilities from the task force findings it is surprising that spreads didn't widen further, said the trader, adding he may have expected a larger move of around 25bps. The economic impact of the blackout could potentially be in the millions, and if any legal cases are brought against FirstEnergy the utility could have huge liabilities, he said.

Fitch Ratings rates the firm BBB minus on stable outlook, having downgraded the corporate from BBB on negative outlook on Sept. 30. Philip Smyth, director in New York, said the main issue affecting FirstEnergy's credit rating continues to be getting its Davis-Besse nuclear power station back up and running. The plant was shut down last year due to a nuclear outage, with FirstEnergy predicting it will restart the plant by year-end. However, Fitch believes it is more likely that the plant will restart in the first quarter, he said. While the report by the task force was negative on FirstEnergy's role in this year's blackout it remains to be seen what implications this may have, he added.

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