S&P Global Ratings downgraded FirstEnergy Solutions Corp. based on the FirstEnergy Corp. competitive subsidiary's discussions with creditors ahead of a potential bankruptcy filing.
On Aug. 14, S&P lowered its issuer credit rating on FirstEnergy Solutions, or FES, to CCC- from CCC with a negative outlook. The rating agency announced that it also lowered FES' secured debt to CCC+ from B- and its unsecured debt to CCC- from CCC.
"The rating action stems from the recent announcement by FirstEnergy Solutions that it was pursuing exchange discussions with its creditors," S&P analyst Michael Ferguson wrote in the Aug. 14 report. "This announcement appears to potentially accelerate the timeframe to default, which we had previously believed would immediately precede 2018 maturities."
FirstEnergy management said on a July 28 earnings call that they planned to meet with FES creditors the week of July 31 as the independent board of directors at FES weighs debt restructuring and potential bankruptcy. "I think it is clearly the preferred route if we end up in a bankruptcy proceeding with FES to do it through a structured settlement that all parties are comfortable with," FirstEnergy President and CEO Charles Jones Jr. said on the call.
S&P said "low recovery expectations" for FES' portfolio of unregulated generation and bond spreads that indicate "severe distress" will likely lead to an exchange for less than full compensation. The rating agency said it expects FES could file for bankruptcy within the next six months.
"While uplift for nuclear assets via either a state subsidy or the [U.S.] Department of Energy study is possible, we consider neither in our base case, and believe that even these would not forestall bankruptcy indefinitely," Ferguson wrote.
S&P also lowered the senior secured debt for FirstEnergy Generation LLC and FirstEnergy Nuclear Generation LLC to CCC+ from B- and senior unsecured debt for the FES affiliates to CCC- from CCC.
Evercore ISI on Aug. 14 upgraded FES parent FirstEnergy to "outperform" from "in line" based on the engagement with FES bondholders. "A settlement would be a constructive direction for [FirstEnergy to] pursue as it exits the competitive business and focuses its [efforts] on becoming a purely regulated utility holding company," Evercore analyst Greg Gordon wrote.
No further details around the meeting with FES creditors have been released.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.