S&P: GenOn Energy Inc. And Affiliates 'CCC' Ratings Affirmed; Outlook Negative
Downside scenarioConsistent with our criteria, we see the probability of a downgrade to 'CCC-' as likely by year-end because we see increasing probability of the company defaulting prior to, or by, June 2017, when it faces a large refinancing. The ratings are not currently 'CCC-' because we do not see a distressed exchange as inevitable over the next six months. GenOn's downside risks stem from the backwardated cash flow profile as hedges fall away in 2016 under the prevailing forward prices. We expect GenOn to be disproportionately affected relative to peers, as the loss in dark spreads is not offset by increasing spark spreads or an expansion in market heat rates. We would downgrade GenOn on announcement of any distressed exchange.
Upside scenarioThough unlikely, we could revise the outlook to stable if potential asset sales mitigate liquidity needs to address 2017 maturities and the forward power prices improve such that GenOn can maintain an adjusted FFO to debt ratio of about 4%-5%. An upgrade, currently not under consideration, could occur if a rebound in capacity and energy markets auctions supports the operations of its coal plants or if environmental regulations are not as stringent as we expect. In particular, we will monitor the hedges that the company is able to place to underpin its financial performance. However, an upgrade would require FFO to debt ratios that are consistently over 5%.