Despite the extension on collateral requirements given last week to NRG Energy from its lenders, fixed-income analysts on the buy- and sell-sides say the banks may still decide to pull the plug on the independent power producer. Even those who believe the banks are unlikely to force the company into default say that such an event would cause another wave of selling in the IPP sector--just as bond prices are showing signs of a recovery. "A nation of sheep is investing in these things. It would not be a positive development," says one East Coast buy-side analyst.
Under provisions in its lending agreement, NRG must provide banks with over $1 billion in cash collateral due to a recent ratings downgrade. Though the deadline for posting the collateral passed a week ago, the banks agreed to give NRG until Sept. 13 to come up with the cash.
NRG officials have said publicly that they will seek a further extension, but Peggy Jones, an analyst at ABN Amro, believes banks will force the company into default. "The wholesale power market is too weak for companies to be able to sell assets and provide financial projections to banks that will paint a reasonably favorable picture of how to work through these problems," she says.
NRG, which has approximately $9 billion outstanding in publicly held bonds, would be the first merchant energy company to default on its debt. Many others are struggling, however, including multi-billion dollar issuers Calpine Corp. and AES Energy. Both companies' bonds were bid in the 40's last week. NRG's bonds, all of which trade at the same price, were bid three points higher after last Tuesday's extension. Last Friday morning, they were quoted at 23.
Even more stable credits such as Duke Energy would likely be hurt in the event of an NRG default, says Tim Bond, a buy-side analyst at Conseco Capital Management. While Bond believes the banks will grant another extension, he says it is difficult to know what NRG's assets are worth, because none of the IPPs has pulled off a major asset sale. "If NRG doesn't work out, it obviously affects everybody in the industry," he says. Conseco has already sold the majority of its NRG bonds, but Bond would not comment further on its investments in the sector. --Dan Freed