S&P rates Calgen notes, loan

Standard & Poor's said it assigned its B corporate credit rating to Calpine Generating Co. LLC (Calgen). The outlook is negative.

S&P also assigned its B+ rating and its recovery rating of 1 to Calgen's $1.3 billion first priority senior secured term loan and assigned its B- rating and its recovery rating of 3 to Calgen's $1.05 billion second priority senior secured notes.

S&P said the ratings reflect the certain risks, including the expectation that after 2009, revenues will predominantly come from volatile merchant sales; there is a potentially high level of execution risk associated with refinancing the term loan in 2010 and the floating-rate notes in 2011; the debt does not amortize and Calgen is highly dependant on market conditions for refinancing the plants; and the fact that Calpine Corp. itself introduces credit risk because Calgen is not structurally separate from Calpine Corp. and hence, could be consolidated into a Calpine Corp. bankruptcy.

S&P also noted there is no debt service reserve fund or cash traps to preserve Calgen liquidity and cushion revenue volatility.

Mitigating factors include the fact that the contracts with Calpine Energy Services and other third parties should cover interest expense and fixed costs if spark spreads decline significantly through 2008; a $750 million working capital facility should provide liquidity to cover interest expense and fixed costs, particularly after two of the contracts with Calpine Energy Services expire in 2008 and 2009; and the working capital facility should also cover expenses due to business interruption, force majeure, and liquidated damages.

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