Power players with a merchant flavor may not yet be out of the woods regarding debt refinancing, despite the fact the sector paid off some $20 billion of borrowings over the last couple of years.
A new report byStandard & Poor's puts the current debt bill at $58 billion, after the pay downs and also $12 billion taken out via bankruptcy filings. "There are still risks for certain companies," said Arleen Spangler, credit analyst and author of the report at S&P, citing NRG Energy and Calpine as examples of players with merchant assets.
Some industry officials question what conclusions can be gained by analyzing the sector overall when there are so many nuances from company to company. Mike Pepe, the ex-head of project finance at Banca Intesa, noted Duke Energy has the greatest refinancing need according to S&P. "But, Duke may have the least volatile cashflow--a large portion of this is regulated--of those on that list," he said.
The report argues weak regional power markets and litigation risk may play a role in determining the success of refinancings. Spangler said another important dynamic is the percentage of bank debt versus capital market debt. Reliant Energy, for instance, managed to refinance a chunk of its bank debt, but only over a relatively short-term period, Spangler noted, though the recently announced sale of some of its New York assets will improve the situation, she added.
Overall, the picture for the merchant sector is much less bearish than a year back. "We don't see any companies that are on the doorstep of failing," Spangler stated. But the report also argues that until the cash flows from merchant activities become clearer, a question hangs over what capital structure the business can support. The report also points out that out of the pool of 23 merchant companies analyzed, 15 have a negative credit rating outlook.