Mirant Corp. shares plummeted 16% last Thursday to $2.28 following a downgrade to “sell” from “neutral” by Merrill Lynch analyst Elizabeth Parrella. She said the chances are increasing that the company will miss today’s deadline to gain approval from banks of its plan to refinance $4.9 billion of debt.

“We believe that the probability of achieving an out-of-court debt restructuring by the July 14 midnight deadline has declined below 50%, maybe well below,” said Parrella.

Atlanta-based Mirant also has asked bondholders and bank lenders to approve a prepackaged bankruptcy plan in case it cannot complete the bond exchange and refinancing deal.

The company sweetened its refinancing package earlier this week, offering its banks a slightly higher interest rate, additional debt seniority and more stock options at a lower strike price, according to a filing Wednesday with the Securities Exchange Commission. The sweetened offer, according to some analysts, could appear much more attractive to the banks, which would rather avoid taking their chances with a bankruptcy judge (see NGI, June 30).

On June 2, Mirant unveiled the restructuring plan to avert bankruptcy by extending upcoming debt maturities. The company asked bondholders to exchange $1.45 billion in existing bonds for new bonds with later maturities, some cash and stock options. It also asked its banks to refinance more than $3 billion in loans.

Last week, the company gained approval from the holders of more than two-thirds of bonds for the exchange. That’s the amount of support needed for a prepackaged reorganization in bankruptcy court, which puts pressure on the banks to approve the refinancing. For an out-of-court refinancing, 85% of bondholders must agree to an exchange.

But the bond exchange is contingent on the successful refinancing of the bank debt. The bank lenders have opposed the restructuring because they wanted the new bank debt to have a senior position in the capital structure to the new bonds. The sweetened deal may provide just enough incentive for them to sign.

In Wednesday’s revised proposal, Mirant increased the maximum amount of bank debt that will be senior to the company’s new secured bonds to $1.25 billion from $1.1 billion. Mirant also increased the interest rate of its term loan facility to 450 basis points over the LIBOR rate from 425 basis points over LIBOR in a prepackaged bankruptcy filing. Mirant still would have the option of paying a base rate plus 3.25%.

Mirant also reduced targeted loan repayments of $200 million, $500 million and $500 million on the second, third and fourth anniversary, respectively, of the restructuring’s closing to $100 million, $300 million and $350 million. The expiration date for the bond exchange offers is still July 14, when a $1.125 billion bank facility comes due.

Bank lenders also would get warrants on almost 25 million shares of Mirant common stock, up from almost 15 million shares. The strike price on the warrants for stock was reduced to the market price six months after reorganization’s closing from 120% of the market price.

The strike price for the warrants to be granted to bondholders was also lowered to the market price. The number of warrants offered to bondholders in the exchange remains unchanged for a total of about 16 million shares. Mirant has slightly more than 400 million shares of common stock outstanding.

However, Parrella is concerned that there is less than a week left to reach an agreement, even though many bank restructuring deals in the troubled energy sector have gone down to the wire. “Our view of the probability is colored to some extent by the shortened time frame,” she said. “While most of the bank deals in this sector have gone down to the wire or even been extended they all had the lead banks on board at this point. To our knowledge, neither Citibank nor [Credit Suisse First Boston] has yet agreed to support MIR’s plan.

“If there were a strong consensus in the bank group in favor of the plan, and more time was needed to persuade ‘holdout’ banks, we believe that steps would have been taken already to extend the deadline.” She noted that an out-of-court deal requires 100% participation of the bank group.

Reliant Resources Inc. and Allegheny Energy Inc. both reached last-minute restructuring deals, but Xcel Energy’s NRG Energy Inc. unit and PG&E Corp.’s National Energy Group have already filed for bankruptcy.

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