Standard & Poor’s Ratings Services announced Tuesday it is establishing new liquidity adequacy guidelines for U.S. energy merchants, which are particularly vulnerable to large and sudden liquidity demands related to collateral calls.

In addition, as part of its effort to continually refine and enhance its analysis of energy trading and marketing operations, Standard & Poor’s (S&P) will initiate a quarterly survey of all investor-owned electric and gas companies to assess companies’ potential liquidity risk. Companies will be asked to estimate their liquidity requirements at a point in time each month.

The new framework for analyzing liquidity adequacy focuses on liquidity under a combined stressed scenario that incorporates a negative credit event that drops a company below investment grade, and an adverse market event — a gas or power price change of 30% or more.

“In particular, Standard & Poor’s believes that investment-grade companies should maintain enough liquidity to address a scenario in which there is a crisis of confidence in the company’s financial condition and, at the same time, a 30% adverse movement in power and oil/gas prices,” said S&P credit analyst Tobias Hsieh. “Although a shortfall from this guideline is just one factor in the overall ratings analysis, the degree and magnitude of such a shortfall could have negative ratings implications.”

To gain a favorable S&P rating a company would have to be able to post enough collateral to cover its entire negative mark to market (MTM) exposure, plus other negative side effects from a below investment grade rating.

S&P noted that in four different industries, utilities, energy and natural resources, health and chemicals and capital goods and mining, about 20-30% of investment-grade companies in the BBB category have fallen below investment grade in the last three years. About 5% of A- companies have fallen below investment grade.

The high demand for liquidity in the energy trading and marketing sector relates to the fact that these operations buy and sell large volumes of highly volatile and illiquid energy products in the forward market that cannot be effectively cleared through collateral-clearing platforms or exchanges. A number of high-flying trading companies have crashed and burned in this high risk business over the last several years.

Over the past six years, the annual price change of power and gas was greater than 30% about 50% of the time, the S&P report said.

The report, “Analyzing the Liquidity Adequacy of U.S. Energy Marketing and Trading Operations,” is available for subscribers to RatingsDirect, Standard & Poor’s Web- based credit research and analysis system. Non-subscribers, may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com.

Standard & Poor’s will hold a teleconference call Thursday, May 6 at 2 p.m EDT to discuss this report and survey. Live Dial-in Number: 1-712-257-2017 Conference ID# 3663755 Passcode: SANDP Call at least 15 minutes before the scheduled start to complete the pre-call registration process.

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