New York, March 26, 2003 — Moody’s Investors Service downgraded the ratings of Mirant Corp. and its subsidiaries.
Mirant’s senior implied rating was lowered to B3 from Ba3 and the senior unsecured rating was lowered to Caa2 from B1. Mirant’s senior unsecured ratings continue to be notched down from the senior implied rating due to the expectation that future renewals of existing bank debt will be done on a secured basis, effectively subordinating the senior unsecured bonds.
The ratings downgrade reflects: (i) continuing uncertainty related to the ultimate resolution of the company’s significant debt obligations coming due over the next three years, including $3.0 billion of bank credit facilities, given the company’s limited access to public debt markets, (ii) ongoing concerns about the level of cash flow that the restructured company will be able to generate relative to its high financial leverage, and (iii) the likelihood that minimal amounts of free cash flow will be available for further debt reduction resulting in continued reliance on asset sale proceeds.
Moody’s is maintaining a negative outlook due to: (i) lack of clarity around the amount of secured debt that may ultimately be put in place and structural and effective subordination that may arise as a result, (ii) uncertainty as to potential liabilities arising from ongoing government investigations and lawsuits related to California’s power markets and; (iii) uncertainty surrounding the outcome of the ongoing independent auditors review of the company’s financial statements for 2000 and 2001 and delays in providing full-year 2002 results.
Despite ongoing restructuring efforts, Mirant’s credit profile remains weak due largely to a capital structure that consists of too much debt relative to operating cash flow levels, with prospects for material improvement in the near-term being uncertain at best. The company currently estimates its liquidity, made up almost entirely of cash on hand and excluding restricted cash, to be $1.0 billion.
Furthermore, Mirant doesn’t expect any material improvement in liquidity, or reduction, related to ongoing operations during the next few months. Therefore, events likely to have the largest impact on the company’s liquidity in the near term are; the refinancing of its bank credit facilities, asset sales, and reductions in capital required to support a smaller gas marketing business.
Debt maturities in 2003 include Mirant Corp.’s $1.125 billion credit facility due in July (the term out provision has already been exercised) and amortization of debt at various subsidiaries totaling $400 million (including the gas prepay). Given Mirant’s current liquidity and assuming the company’s operations don’t consume cash over the near term, Mirant appears to be dependent upon asset sale proceeds in order to meet its obligations through year-end 2003.
In addition, a substantial portion of the $2.3 billion in debt maturing in 2004 needs to be refinanced. The company is currently in the process of developing a comprehensive plan to address the debt maturities coming due over the next several years, but at this point the company has not provided Moody’s with any details. Therefore, Moody’s is maintaining a negative outlook on all Mirant’s ratings pending further clarification on the amount of secured debt to be added. Moody’s notes the ratings most at risk for further downgrade are Mirant Corp’s senior unsecured ratings and MAGI’s senior unsecured ratings, however, such an action will be dependent upon Mirant’s refinancing plans.
Concern related to Mirant’s ability to generate sufficient levels of operating cash flow relative to its total debt of approximately $9.7 billion continue to have a negative impact on the ratings. Although debt levels have come down since last September, very challenging market conditions are expected to continue to pressure operating cash flow generated by the North American merchant power business and energy marketing and trading businesses.
Therefore, Moody’s believes the prospects for significantly improving levels of operating cash flow in the near to medium term remain uncertain and unlikely. In response to current market conditions, Mirant has slashed its capital spending budget for the foreseeable future to levels approximating maintenance only. However, even after considering reduced capital reinvestment, low levels of operating cash flow are likely to result in minimal amounts of free cash flow, leaving Mirant highly dependent upon asset sale proceeds to further reduce debt.
Moody’s has lowered the following ratings:
Mirant Corporation’s senior implied rating to B3 from Ba3;
Mirant Corporation’s senior unsecured debt to Caa2 from B1 and sr. unsec./sub. shelf ratings to (P)Caa2/(P)Ca from (P)B1/(P)B3;
Mirant Americas Energy Marketing, L.P.’s (MAEM) issuer rating to B3 from Ba3;
Mirant Americas Generation, LLC’s (MAGI) senior unsecured debt to B3 from Ba3;
Mirant Mid-Atlantic, LLC’s (MirMA) senior secured debt ratings to B2 from Ba3; and
Mirant Trust I’s trust preferred stock rating to Ca from B3.
Mirant owns an international portfolio of electric and gas assets. MAEM is Mirant’s US marketing and trading arm. Subsidiary MAGI holds a portfolio of US power assets. MAGI subsidiary MirMA holds power assets near Washington D.C.