Amid concerns that Mirant may be likely to file for Chapter 11 bankruptcy protection if it cannot extend its near- and intermediate-term debt maturities, Standard & Poor’s Ratings Services (S&P) last week lowered the Atlanta-based energy supplier’s ratings to “CC” from “CCC.” Mirant has about $9.7 billion in debt, including lease-related debt.

Mirant has asked creditors holding approximately $3.5 billion of its unsecured debt that matures on or before May 1, 2006, to amend terms to extend their debt maturities until July 15, 2008 (see NGI, June 9). The amendment would be achieved by creditors exchanging their obligations for new obligations in which Mirant will pledge essentially all of its remaining unencumbered assets and grant warrants on its common equity.

S&P analysts noted that the ratings action followed Mirant’s disclosure that it has also asked its bank group to vote on a prepackaged Chapter 11 bankruptcy filing plan, “which could indicate difficulties completing the exchange offer. The threshold for completing a prepackaged bankruptcy filing (two-thirds vote of creditors needed for approval) is less than for the exchange offer (requiring the approval of at least 85% of outstanding creditors).”

Mirant also recently disclosed that its Mirant Americas Generation LLC unit received notice of a default on credit facilities from Lehman Brothers Commercial Paper Inc. because of its failure to deliver March 31, 2003, financial statements on a timely basis.

“In addition to concerns that Mirant may be more likely to file for Chapter 11 bankruptcy protection, the lowering of the corporate credit rating reflects Standard & Poor’s opinion that the planned exchange offer (often referred to as an ‘out-of-court’ restructuring) qualifies as a coerced distressed exchange,” said S&P analysts. “Standard & Poor’s believes that Mirant would have great difficulty meeting all of its obligations as originally promised absent the exchange.”

Under S&P criteria, exchange offers are considered coercive “by virtue of the investor’s contemplation that refusal to accept the offer may lead to an even worse alternative, which in this case could involve a voluntary bankruptcy filing and the use of the bankruptcy code’s ‘cramdown’ provisions.” In recently Securities and Exchange Commission filings, noted analysts, Mirant has indicated that it could seek bankruptcy protection, whether through a prepackaged transaction or otherwise, if the exchange offer is not completed.

“If the exchange offer were to be completed, Standard & Poor’s would lower Mirant’s corporate credit rating to `SD,’ which represents selective default and then immediately assign a new rating based on Mirant’s prospective creditworthiness. Such a rating is likely to be higher than `CC’. If the exchange offer is not completed, Standard & Poor’s believes that a voluntary bankruptcy filing likely would occur shortly thereafter, and the ratings would be lowered to `D’ upon such an event.”

Mirant’s obligations also were put on S&P’s CreditWatch negative from developing. The ratings agency analysts expect to resolve the CreditWatch listing following the outcome of the exchange offer and pending a review of Mirant after a “successful debt restructuring.” Mirant’s exchange offers are set to expire on July 14, unless they are extended, according to S&P.

Besides the parent corporation, S&P also lowered the trust preferred stock rating on the company to ‘C’ from ‘CC’; and the senior secured debt rating on Mirant Mid-Atlantic LLC to ‘CC’ from ‘CCC’. These ratings remain on CreditWatch with developing implications.

S&P may be concerned about Mirant, but Blaylock & Partners analyst Lasan Johong believes the company is executing a brilliant strategy that will allow it to avoid heading into bankruptcy court. Although most analysts and investors seem prepared to pull the plug on Mirant’s ship, Johong expects the banks will find a way to keep Mirant afloat. “I think I’m being realistic and everybody else is burying their head in the sand,” Johong said in an interview. “When the original deal hit, I told everybody that the probability of them actually executing this deal is extremely high. Everybody thought I was nuts.”

He said many people failed to understand the dynamics of Mirant’s plan. It has put the banks between a rock and a hard place. “The reason why they have a prepackaged Chapter 11 in place, or why they want to get one in place, is because that’s the hammer they are going to use over the banks’ heads to get a deal done. Because otherwise, the banks have all the power and the Mirant bondholders and Mirant itself don’t have any power,” said Johong.

The banks don’t want to approve the prepackaged deal. In fact they probably don’t even want to vote on it, said Johong. If they take Mirant into Chapter 11, they want to do it on their own terms.

The problem comes down to one thing: how the bankruptcy judge would view the banks’ decision. According to Johong, the judge is likely to look at the Mirant offers to bondholders and the banks and say that it’s a rateable and equitable deal. If that’s the way he views it, “then the banks get the deal crammed down their throats” whether they want it or not, said Johong.

“The banks will say, ‘Well, we didn’t approve it and in fact we didn’t even vote.’ The judge will say, ‘Why not?’ And what are the banks going to say? That they were piggy and wanted all the security for themselves? That sounds pretty damn bad, doesn’t it? In fact, that’s exactly what Mirant wants to do to the banks. They want to put them in a position where they cannot win, where they are in checkmate. Mirant can probably line up five to 10 experts who will testify that the value of their assets is greater than the coverage that the banks require.

“If the banks approve the deal, game’s done, match over. If they don’t approve the deal, then the judge will either say, ‘You had a chance and didn’t vote, and now you don’t get a vote’ or ‘You were piggy and greedy and wanted to get all the security for yourself, and I can’t allow that so we are going to jam the deal down your throat.’ That’s a pretty neat little Chinese finger cuff.”

As a result, Johong concludes that the incentive for the banks and Mirant to reach a deal outside of court has gone even higher, not lower as the market has suggested. “It’s a brilliant strategic move.”

“Mirant has a number of things they can do. They can play with the interest rate. They can shorten the term of the deal, which in my opinion is the most likely outcome. They can increase the fee. Or they can juice up the warrants. Mirant can work any of those four triggers in order to sweeten the deal for the banks to stay out of Chapter 11. The incentive is so large that it would be astounding to me if the banks decided not to deal outside of Chapter 11. I would be flabbergasted.”

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