Standard & Poor’s Ratings Services joined other top ratings agencies in cutting Mirant’s credit rating to junk on Monday, citing a heavy debt burden, declining cash position and a growing dependence on asset sales to maintain liquidity.

A Mirant spokeswoman said the action was “disappointing” but “no surprise.” She said it would not trigger a default, acceleration of debt obligations nor any new collateral obligations, and added that the company has adequate liquidity to manage its operations.

S&P lowered its corporate credit and senior unsecured ratings on Mirant and its subsidiaries to “BB” from “BBB-“, and its preferred stock rating to “B” from “BB.” The outlook for the company remains negative. S&P noted that Atlanta-based Mirant and its subsidiaries have about $10.7 billion in outstanding debt, and $2.2 billion in cash.

“The rating action follows Standard & Poor’s expectation that Mirant’s probable financial performance in the next two to three years will not support an investment-grade rating and, furthermore, that the combination of depressed power prices, high leverage, and weakening liquidity suggest the potential for greater financial uncertainty,” said Standard & Poor’s credit analyst Terry Pratt.

Dependence on an asset sale strategy to support liquidity, weak trading fundamentals, some uncertainty surrounding Mirant’s accounting issues and practices, and potential liabilities resulting from legal proceedings indicate a negative outlook, the analyst added. Mirant CEO Marce Fuller said last month the company may sell another $1 billion in assets to strengthen its balance sheet (see Daily GPI, Sept. 20). Favorable developments on all of Mirant’s challenges are required to move the outlook to stable, said S&P’s Pratt. The ratings could fall further if Mirant’s liquidity position weakens to the point that its ability to meet near-term obligations is in jeopardy.

Moody’s Investor’s Service downgraded Mirant earlier this month, citing “significantly lower operating cash flow relative to its high debt burden, coupled with the likelihood that future operating cash flow levels may weaken further due to asset sales and challenging market conditions for the North American merchant power business and the energy marketing and trading business” (see Power Market Today, Oct. 11). Moody’s assigned Mirant a senior implied rating of Ba3 and a senior unsecured rating of B1.

Moody’s noted that in 2001, Mirant’s consolidated operating cash flow before working capital changes was $1.3 billion, but unaudited six-month results for 2002 indicate operating cash flow of $235 million, compared to $836 million for the first six months of 2001. The company’s businesses “have been negatively impacted by weak power markets and a continuing lack of investor and counterparty confidence,” Moody’s said. Mirant’s most significant challenges will be reducing its debt to a level in line with its cash flow and refinancing debt maturities in 2004. However, Moody’s said Mirant appears to have adequate liquidity to meet its obligations through year-end 2003.

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