Moody's Investors Service continued its recent spree of downgrading companies in the power sector last week by slashing the rating of NRG Energy and its parent Xcel Energy. The senior unsecured rating of NRG was lowered from Baa3 to B1, while that of Xcel was lowered from A3 to Baa2. The ratings of both companies remain under review for possible further downgrades.
Angelo Sabatelle, senior credit officer at Moody's, said NRG's downgrade reflects the company's weak operating cash flows relative to its high debt level and the very tight liquidity position of the company. Liquidity pressures have been exacerbated by a requirement to post a total of $1.1 billion in collateral for creditors at subsidiary project financings and for the company's construction revolver. The Minneapolis generation company intends to post the necessary collateral at each of the subsidiary project financings over the next 30 days and is seeking an amendment from its bank group to defer the posting of such collateral until it can raise funds from asset sales. NRG anticipates raising about $1.5 billion in net proceeds from the sale of its international generation assets, as well as the sale of a portion of its domestic assets. The majority of these asset sales are anticipated to close by year's end.
Xcel's downgrade, meanwhile, reflects the extent to which the parent has provided capital and liquidity support to NRG operations, Sabatelle said. Xcel has infused $500 million of capital into NRG, has provided guarantees for NRG's marketing and trading book and could provide an additional $400 million of capital. Xcel's ability to provide this incremental capital to NRG could be constrained since a default by NRG is also considered a default under Xcel's revolving credit facility. Xcel intends to eliminate the potential cross default by attempting to amend this revolving credit agreement. Calls to NRG were referred to Xcel officials, who did not return calls by press time.
* Moody's also continued its assault on the telecom industry by downgrading Genuity's senior unsecured rating and the rating of its $2 billion revolver from Ba1 to Ca. The downgrade reflects Verizon Communication's recent decision to cancel its option to reintegrate Genuity and the subsequent default under change of control provisions in the company's credit facilities, according toDennis Saputo, senior v.p.
Genuity's former rating was much higher than what its stand-alone rating would have been due to the likelihood of its reconsolidation with Verizon, Saputo noted. Verizon's decision to forego reintegration has resulted in Moody's analyzing the Woburn, Mass., Internet infrastructure services provider on a stand-alone basis. Furthermore, Verizon's share conversion caused an event of default under Genuity's credit facility.
Prior to the default, Genuity requested that its bank group fund the remaining $850 million of availability under the $2 billion revolver. To date, $723 million has been funded, representing eight of the nine lenders in the group. Deutsche Bank has yet to fund, and Genuity has indicated that it has taken legal action to require the bank to satisfy its obligation.
Deutsche Bank could not comment on the legal action as it has not yet been served, but a spokesman said that any claim that the bank has failed to fulfill its obligations under the credit agreement is incorrect. Calls to Genuity were not returned by press time.