Credit analyst: Market reaction to El Paso mild, given downside risk

By Ronda Fears

Nashville, Tenn., Sept. 25 - Given what Carol Levenson, director of research at Gimme Credit sees as considerable downside risk in El Paso Corp., she said the bond market reaction has been mild.

El Paso (Baa2/BBB+) was blindsided by the FERC administrative law judge finding that it had exercised market power during the California energy crisis in order to drive up prices, which sent El Paso stock down 55% and prompted rating reviews by both major rating agencies.

While management has not put a number on the potential financial impact of the FERC decision if it comes to pass, the analyst said the $4 billion loss in market value might be a reasonable proxy.

"We'd have to believe the company would consider filing some or all of its units into bankruptcy if faced with legal liabilities of this magnitude," Levenson said in a report Wednesday.

"Even before the FERC decision it was clear the good El Paso - the stable, asset-rich regulated businesses - continued to be dragged down by the bad El Paso - mainly the trading business.

"Although management has vowed to spend no more next year than the company will produce in cash flow, we fear their cash flow forecast is optimistic."

For example, it assumes no impact from working capital, which in the first half consumed cash of $700 million, an alarming $2.4 billion negative swing from last year.

Furthermore, she noted El Paso, which boasted of $5.8 billion in liquidity as of July 31, saw its cash on hand shrink $900 million in the month since the quarter ended.

The rating reviews are likely to prompt additional cash drains in the trading business.

"Moreover, the company's $4 billion in bank lines, though untapped, contain a 70% leverage covenant, and by our traditional leverage calculations, there's not a lot of cushion there," Levenson said.

"We believe the bond market reaction has been mild, considering the downside risk here."

If there's a silver lining in this cloud for bondholders, she said, it's the fortuitous execution during the past few months of the first steps of El Paso's balance sheet enhancement plan - $2.5 billion in equity securities and removing $4 billion in ratings triggers from its off balance-sheet obligations.

"In retrospect, El Paso's equity issuance in June at $19.95/share looks like a pretty shrewd move, even though at the time this price represented a 65% discount from the high for the year," Levenson said.

The removal of ratings triggers might turn out to be its most prudent move, she added, as this week's events make a downgrade more likely, and there are other concerns still looming.

"Of course the California saga is far from over," Levenson said.

"El Paso would make such a dandy whipping boy for the state's politicians. They're probably drooling at the prospect of wringing refunds and even multiples of damages out of the Texas company."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.