Fitch Ratings does not expect to take any immediate rating action on Texas Competitive Electric Holdings Company LLC (TCEH) or Energy Future Competitive Holdings Company (EFCH) following the companies' proposal to amend and extend their senior secured credit facilities (facilities). Fitch currently rates both companies 'CCC' with a Negative Rating Outlook and views the offer as the most significant step thus far in TCEH's ongoing liability management program.
The extension proposal seeks to push the $23.3 billion wall of 2013-14 debt maturities by three years in the hope that the power markets in the Electric Reliability Council of Texas (ERCOT) recover beforehand. Fitch would view a significant participation by the lenders in the maturity extension as a positive outcome as it would reduce near-term default probability. However, Fitch notes the extension would not result in debt reduction and would lead to a modest worsening of credit metrics due to higher interest costs on the extended facilities.
The amendment proposal, if approved, would be a credit positive in Fitch's view as it would indicate the willingness of the current lender group to work with the company and reduce the likelihood of a covenant breach.
Natural gas prices and heat rates in ERCOT remain key determinants for TCEH's underlying business performance. While TCEH's above-market natural gas hedges provide insulation against the currently low power prices, the hedge position will significantly decline in 2013 and 2014. In addition, several capital structure-related execution issues will yet remain such as refinancing the $4.6 billion 2015/16 TCEH LBO notes and the maturity of the residual facilities that are not extended beyond 2013/2014. Fitch will factor the effects of the amendment and extension as well as Fitch's views on ERCOT power market and TCEH credit fundamentals into future rating actions.
Fitch believes the amend and extend proposal is targeted to achieve the following objectives:
--Provide a longer runway to TCEH on the road to market power price
recovery by extending maturities of its facilities by three years. Power
prices in ERCOT are currently depressed and even at the improved 2014
forecasted levels render TCEH's current capital structure untenable.
--Obtain
covenant relief under the facilities for the secured debt to EBITDA
maintenance covenant as TCEH's EBITDA continues to be impacted by a slow
recovery in heat rates in ERCOT and rising fuel costs.
--Address
the facility lender Aurelius' assertion regarding the 'arms-length'
nature of inter-company loans and proper calculation of excess cash flow
for mandatory repayments.
Background: TCEH is seeking certain amendments to its Credit Agreement that include, among other things, covenant relief to its secured debt to EBITDA financial maintenance covenant. In addition, TCEH is requesting that lenders under the facilities acknowledge that (i) the inter-company loans from TCEH to EFCH comply with the requirement in the facilities that these loans be made on an 'arm's-length' basis; and (ii) no excess cash flow mandatory repayments were required to be made by TCEH for fiscal years 2008, 2009 and 2010. TCEH will pay a consent fee of 50 basis points to lenders that consent to the amendments. Lender replies to the amendment request are due on April 7, 2011 and a simple majority is needed for approval. TCEH has publicly expressed its belief that, based on private negotiations, more than 50% of the lenders under its facilities are likely to approve the amendments.
In addition, TCEH is asking all of its lenders under the facilities to extend:
(1) the maturity of TCEH's first lien term loans and LC facility to October 2017 from October 2014 and increase the interest rate on such extended term loans to LIBOR plus 4.50% from LIBOR plus 3.50%; and
(2) the maturity of the revolver to October 2016 from October 2013 and increase the interest rate on the extended revolving loans to LIBOR plus 4.50% from LIBOR plus 3.50% and increase the undrawn fee with respect to such commitments to 1.00% from 0.50%.
TCEH will pay an up-front fee of 350 basis points on extended term loans and extended deposit letter of credit loans to lenders that agree to the extension. Lender replies to the maturity extension request are due April 12, 2011.
TCEH also announced that it intends to issue new first lien notes in order to fund pro-rata repayments of certain outstanding loans under the facilities and fees and expenses incurred in connection with the amendments and the extension.
Fitch's currently rates TCEH as follows:
--IDR 'CCC';
--Senior secured bank facilities 'B+/RR1';
--Senior
secured second lien notes 'B/RR2';
--Secured lease facility bonds
'B-/RR3' (secured by certain combustion turbine assets);
--Senior
unsecured (guaranteed) notes 'CCC/RR4';
--Senior unsecured debt
(non-guaranteed) including various pollution control bonds issued by the
Brazos River Authority (TX), Sabine River Authority (TX), and Trinity
River Authority (TX) 'CC/RR5'.
Fitch currently rates EFCH as follows:
--IDR 'CCC';
--Unsecured notes 'CC/RR5'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology', Aug. 16, 2010
--'U.S. Power and Gas Comparative
Operating Risk (COR) Evaluation and Financial Guidelines', Aug. 22, 2007
--'Fitch's
Approach to Rating Competitive Generators', July 24, 2007
--'Utilities
Sector Notching and Recovery Ratings', March 16, 2010
Applicable Criteria and Related Research:
Corporate Rating
Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
U.S.
Power and Gas Comparative Operating Risk (COR) Evaluation and Financial
Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030
Fitch's
Approach to Rating Competitive Generators
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=333818
Utilities
Sector Notching and Recovery Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546
Coercive
Debt Exchange Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=427866
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Contacts:
Fitch Ratings
Primary Analyst:
Shalini Mahajan, +1-212-908-0351
Director
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One State St. Plaza
New York, NY 10004
or
Secondary
Analyst:
Sharon Bonelli, +1-212-908-0581
Managing Director
or
Media
Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com