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Reign of the Bond Kings

S&P, Moody's, and Fitch tell why credit issues now rule the energy sector.
Fortnightly Magazine - October 15 2002

area, he says. That is no different than any other industry that goes through a recession or sees falling prices.

As far as its investors, Fitch's Hunter says there hasn't been a backlash to be bitter about. "We haven't had investors or old ladies appearing in the lobby with rolled up umbrellas banging us about the head saying, 'my life savings is gone. What were you guys doing?'"

But, he says, "We have had investors phone us up and say, 'we have specific credits that we are concerned about. Are you looking at this? What is your concern?'"

As to whether the agencies should feel remorse, S&P's Barone is blunt. "Everyone seems to say that. I don't see the argument on that. We don't care what they do. If they want to keep their credit rating they have multiple ways to try to do that. They can sell equity and they can pay down debt. If those avenues are closed to them, I don't see how that is the credit rating agency's responsibility."

According to Barone, all that S&P or any other ratings agency does is provide an opinion on the credit quality of the company.

"We are disinterested third parties. Bondholders can take our information to help price bonds that they buy, but I could give a damn if a company goes from an A rating to bankruptcy or bankruptcy to an A rating. Clearly, there is a larger social issue. You don't like seeing people lose jobs. You don't like seeing people lose investments in 401k's or retirements. As a good corporate citizen or as a moral individual you don't want to see those things. But it is not a factor in the ratings."

Yet Barone admits he foresaw the future when Enron was teetering and S&P made the ultimate decision to lower them to non-investment grade:

"We knew it would trigger new credit requirements and knew bankruptcy was imminent." Did that worry him?

"I slept fine that night. I knew we were doing the right thing. We didn't delay the decision because of the looming bankruptcy… I have hated having to be defensive this year. I can't stress enough that all we are is an opinion provider." An opinion with the power to bankrupt companies, or restore them.

Investment bankers would like nothing more than to save their utility clients from bankruptcy. But that's a tall order. For today's energy firm, the possibilities are no longer endless.

George A. Schreiber, Jr., chairman, global power, at investment bank Credit Suisse First Boston, considers how to find buyers for power assets in a depressed market.

"If you look at the assets that are for sale, the listings goes on for pages and pages. The sellers are companies that need to improve their balance sheet and liquidity," Schreiber says.

"There are a lot of assets on the market. Some companies may be able to sell their generating asset that has a contract for the output at a greater value than a pure merchant power plant. [But] due to the decline in spark