No need to panic about energy merchant credit, S&P says

By the OGJ Online Staff

HOUSTON, Dec. 26 -- Even though bond values suggest a credit collapse of the energy merchant sector, Standard & Poor's has not reached that conclusion and is holding current company ratings steady.

"This is not a time to panic," said S&P. "Neither stock market valuations, yield spreads, nor short-term earnings trends should drive credit analysis."

The industry has managed its exposure to Enron Corp.'s bankruptcy well through proper risk-management procedures, S&P said. And even though the capital markets have driven prices down and yields up, several energy merchants have been able to issue new debt to address liquidity concerns, the agency said.

Last week, Calpine Corp., San Jose, Calif., issued $1 billion of convertible senior notes. Mirant Corp., Atlanta, and Dynegy Inc., Houston, issued $750 million and $500 million of equity respectively.

After a review of its ratings of the sector, S&P decided Thursday to maintain its current ratings and outlooks on the companies in the energy merchant sector.

But yet S&P recognized there was a "market perception problem." The agency said each of the energy merchants need to address any balance sheet weakness and formulate and execute a plan in the near term.

S&P warned that some of the companies may have problems executing the plan. If difficulty occurs with shoring up balance sheets, that could "have materially adverse credit ramifications."

Other risks to current ratings could be downgrades from other agencies that could erode trading counterparty confidence, trip ratings triggers, and cause a crisis. Ratings triggers can cause termination of agreements between parties based on the downgrade of just one agency, S&P said.

"Rating triggers limit flexibility of a company and can amplify the seriousness of a credit quality deterioration," S&P said.

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