Reign of the Bond Kings

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

This year saw energy companies forced to make some grim choices-issuing new stock in falling markets, angering investors with dividend cutbacks, selling prized assets at fire sale prices. Some blame it on the rating agencies-the bond kings-who imposed tougher credit standards after the fall of Enron.

Various cash-strapped companies might even have faced bankruptcy if not for those 11th-hour, cash-raising measures, given the combination of falling credit ratings, a general collapse in the stock market and power prices, troubles with creditors, and government inquiries from the SEC and FERC.

Now, most see Dynegy's sale of its Northern Natural Gas Pipeline to MidAmerican as a stroke of luck-given the shortage of potential buyers-even if the $928 million sales price fell $600 million short of what Dynegy had paid initially. That's because the sale avoided a destructive downgrade during a debt refinancing, which surely would have set the dominoes in motion. Such an event could have allowed commercial banks to change the terms of credit lines, demanding more collateral.

Standard & Poor's reported in late August that "the biggest cloud facing the industry over the next 18 to 24 months is an estimated $30 billion of mini-perm debt that needs to be refinanced in the bank and capital markets." But most bankers now do not believe that energy companies will be able to find as much as $30 billion in financing-this year or next-as credit has become scarce. Not in recent memory has the industry seen so many credit downgrades, so quickly, or so often (see Bond Chart, p. 28). That means some tough decisions will have to be made.

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