NeitherFitch Ratings nor Standard & Poor's expect collateralized debt obligations with exposure to Calpine to be impacted significantly, even if the geothermal power producer should default. While there is widespread exposure to Calpine in the CDO universe, most have exposure of 1-3%.
"One transaction had a 5.9% exposure to Calpine, but that was the highest percentage of any transaction," said Kate Scanlin, ratings specialist at S&P. "There only 16 with an exposure of 3% to 5.9% and many with exposure below 3%," she explained. "If there are any negative results from Calpine it will be in the mezzanine notes and the sub notes, not the senior notes," Scanlin said.
The figures used by S&P are based on transactions that have exposure to Calpine and any of its related entities including: Calpine Construction Finance, Calpine Generating, Broad River Energy, RockGen Energy, Rumford Power, Triton Power, Rocky Mountain Energy Center, Riverside Energy Center and Calpine Canada.
S&P has rated 240 U.S. cash flow CDOs, 130 CLOs, 94 CBOs and 16 investment-grade credits with exposure to Calpine. The total monetary exposure is $1.02 billion. Fitch has rated 79 CDOs rated that have exposure to Calpine debt. Out of these, 48 have more than a 1% allocation of their portfolios to Calpine. The breakdown of these 48 CDOs include 29 that own Calpine senior unsecured notes, 14 that own Calpine senior secured notes or loans and the remaining five own a combination of unsecured and secured notes and loans.
A Fitch analyst said Calpine's long journey down the credit slide helps cushion any blow. "A potential Calpine default would not have a broad adverse effect on the CDO market because Calpine's decline has been protracted over several years and in instances where the creditworthiness of a CDO asset deteriorates over a prolonged period, Fitch factors that decline into the CDO notes over time as well," he said. Fitch's corporate debt ratings were placed at highly speculative since 2003. The ratings on Calpine suggested that the company had the potential to default as far back as October 2004.
The analyst notes that while most CDOs will not be downgraded for having exposure to Calpine, CDOs that have exposure to multiple recently defaulted securities may be at risk of a downgrade. "[CDOs with additional exposure to] Delta, Northwest, Allied Holdings, or Delphi may experience negative credit migration depending on the severity of loss and the effectiveness of structural protection remaining in the transaction," he explained.
Moody's Investors Service has not conducted any research on the effect a Calpine default would have on its rated CDOs. "If we put out reports for every company that might default or is rated below investment grade, we'd have no time for new deals. We [only do research on] large defaults," said a spokesman at Moody's.