Energy Firms Face Rating Pressure After Enron Collapse --
By Christine Richard
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Energy companies are facing a confidence crisis following the collapse of Enron Corp. (ENE) earlier this month and that's putting their credit ratings at risk.
Both Moody's Investors Service and Fitch warned late this week that they may strip Calpine Corp. (CPN) of its investment grade rating, in part because investors and bankers have become increasingly skeptical of the company's finances. That's raised concerns about liquidity and financial flexibility that probably won't be limited to Calpine.
"Although Calpine enjoyed access to the capital and credit markets in the past, it now finds itself facing skeptical investors and lenders," Moody's said in a press release late Thursday. Moody's said it now "believes the company's market access is materially reduced."
The action follows a Moody's upgrade of Calpine's debt in October, when its rating was raised to Baa3, or the lowest investment grade rating. That it took just two months for Moody's to shift course and put the company on CreditWatch for possible downgrade highlights how much Enron's collapse has undermined the fund-raising environment for energy companies.
"It's a vicious cycle," said Gretchen Rodkey, corporate bond strategist at Commerzbank Securities. "A lack of confidence can drive a liquidity crisis."
Behind that confidence crisis - reflected in a decline in Calpine's bonds to distressed levels - is a scramble by fund managers to reassess companies that look at all like Enron.
Enron filed for bankruptcy protection earlier this month as confidence crumbled following revelations of large off-balance sheet liabilities and transactions with former employees.
For many fund managers the question of transparency was taken on unprecedented importance.
"People are looking at companies they don't feel completely comfortable with," Rodkey said. "They don't want to be holding something at the end of the year that might be put into question."
That's not to say the reaction across the energy sector hasn't been a bit extreme.
"For the sector as a whole it's probably overdone," said Rodkey. "It needs to be sorted out on a name-by-name basis and that's going to take time."
Dot Matthews, a credit analyst with CreditSights Inc., said the debt market's handling of Enron and other energy companies in recent weeks has been `extreme and hysterical."
Matthews believes, however, that a number of energy names deserve to be knocked down a few notches, not because of investor skepticism but because these companies simply are over-indebted for their ratings.
"People are waking up to the fact that there are more risks in this sector than they took into account before (Enron)," said Matthews.
She sees NRG Energy Inc. (NRG), Mirant Corp. (MIR) and Calpine - all investment grade companies by Moody's reckoning - as more realistically rated at Ba2 by Moody's. That's because their leverage has risen and their interest cover has fallen as these firms have aggressively expanded.
Fitch agreed that more stressful times call for stronger balance sheets.
In cautioning that it was reevaluating Calpine's rating, Fitch appeared more concern with the company's high debt levels, given the shift in market sentiment.
"While the company's operating fundamentals are sound, the financial profile is aggressive, and is not consistent with the current market environment," the agency said Friday.
Fitch said if the rating is changed, it's likely to drop to BB-plus or BB from its current BBB-minus, the agency's lowest investment grade rating.
Among those companies that have announced plans to de-lever in recent days are El Paso Corp. (EPG), which said it was seeking to sell assets, and NRG, which said it was reviewing spending plans and may postpone or eliminate projects.
Matthews said she expects other companies will do the same.
"Either they will get religion and clean up the balance sheet or see their ratings lowered."
-By Christine Richard, Dow Jones Newswires; 201-938-2189;
christine.richard@dowjones.com |
