Credit analyst sees El Paso spiraling downward amid increasing pressure to rework bank lines

By Ronda Fears

Nashville, Nov. 27 - El Paso Corp.'s downgrade to junk by Moody's Investors Service added to its funding gap but also presented another leverage peg for its banks in the likely renegotiation of new facilities, said Carol Levenson, director of research at Gimme Credit.

"When this [current] bank facility was negotiated in May, El Paso had suffered no downgrades and carried mid/strong BBB ratings with stable outlooks," Levenson said in a report Wednesday.

"We think the banks will want to renegotiate these facilities before El Paso's situation gets even worse, and they might play hardball. We see additional downside here."

El Paso (Ba2/BBB-) was indignant in its response to Moody's downgrade, but Levenson noted the company failed to mention a figure for the total cash consequences of the event.

"To our knowledge El Paso has never disclosed the potential cash obligations prompted by a downgrade to junk, apart from the dismantled ratings triggers," Levenson said.

"But its plan to borrow $1.5 billion against its revolver to bolster its $700 million cash position implies it might need to come up with cash within the next 30 days of as much as $2.2 billion."

Of all the balance sheet enhancement actions taken by El Paso this year, the analyst noted that its most prudent move might turn out to be the renegotiation of $4 billion in ratings triggers.

"Thanks to this, and to a fairly lenient bank agreement negotiated in more optimistic times, El Paso might stand a fighting chance after this blow to its financial flexibility," Levenson said.

But, she added, "Despite management's contention there's 'no new news,' this doesn't appear to be a close call between investment grade and junk characterizations. We've long considered El Paso to be of speculative grade credit quality."

Aside from the cash obligations that will be created by the downgrade, she noted that El Paso has huge capital needs coming up for debt refinancing or repayment.

"El Paso faces $1.8 billion in debt maturities next year, the bulk of it in the first half. If for some reason the bank loan can't be extended, this too would be due in the first half of next year," Levenson said.

"Since this represents additional debt, not a refinancing, El Paso's leverage will increase and its coverage and cash flow ratios will weaken."

More than half of the cash requirements arise from the trading business, while the rest is split evenly between commercial agreements and corporate financings.

El Paso said the $1.5 billion drawdown from the revolver would be sufficient even if Standard & Poor's also downgrades it to junk.

And Levenson said management seems confident there will be no impediment to drawing down half of the $3 billion revolver to satisfy these cash needs, or to exercising its option in May of borrowing the remainder and extending the loan for another year, regardless of FERC developments.

"The company's updated liquidity figures show a cash drain, net of commercial paper repayment, of $300 million in less than a month. And this includes the receipt of some asset sale proceeds, perhaps as much as $300 million," Levenson said.

"Clearly, the company's capital spending and dividend requirements need to be reduced sharply."

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