First Energy Solutions Edges Closer to Defaulting

“Both the probability of default and expected losses are high,”
– Moody’s analyst Jairo Chung

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Moody’s Downgrades First Energy Solutions Senior Unsecured Bonds to Ca

On Tuesday January 23rd 2018, Moody’s downgraded the debt of First Energy Solutions (FES) a subsidiary of First Energy (NYSE: FE) to Ca from Caa1.  This downgrade further highlights the well-publicized financial problems facing FES and other regulated power generation companies in the United States.   This news comes just one day after First Energy announced they received an infusion of $2.5 Billion from a consortium made up of Elliot Management and Bluescape Partners and just a week after the Federal Energy Regulatory Commission (FERC) rejected an industry supported push to provide subsidies to coal fired power generation plants.

 First Energy Solutions Munis at Distressed Levels

First Energy Solutions is a competitive energy generation company that services customers in the Northeast, Mid-Atlantic and Midwest sections of the United States.  To build, update and improve their power generation plants FES had issued municipal bonds through industrial development authorities in Pennsylvania, and Ohio where it operates these plants.  With over $2.1 billion dollars in municipal debt outstanding, issued through the Beaver County Industrial Development Authority and the Ohio State Air Quality Development Authority, FES is definitely one of the larger high yield names in the municipal market.
This recent news of the downgrade by Moody’s, along with the company itself announcing in 2017 that it may need to seek bankruptcy protection has not been kind to holders of the company’s municipal bonds.   Currently municipal bonds backed by First Energy Solutions trade in the mid 30s to the low 40s range depending on the quantity and cusip.  This is a far cry from the 110+ dollar price they traded at in the summer of 2016.  One of the more actively traded FES cusips is  074876HM8, and many high yield bonds funds such as the VanEck Vectors High-Yield Municipal ETF (NYSEARCA: HYD) hold positions in First Energy Solutions bonds.

 FES and Only FES is Responsible for the Debt

The $2.1 billion in outstanding debt issued by First Energy Solutions is the responsibility of First Energy Solutions alone.  First Energy does not back the debt and the municipal bond conduit issuers certainly do not guarantee the debt.  During the announcement of the Elliot Management and Bluescape equity investment First Energy said it would begin to create a credit restructuring committee to look at the debt of its energy production units and their future viability.  This announcement has raised questions by Moody’s to FES willingness to make an upcoming $98.9 million-dollar principal payment on April 2nd of this year.

First Energy Solutions is staring into the face of some tough decisions.  They have essentially exhausted all of their political options (i.e. potential subsidies) and are facing some rather large debt payments in the near future.  It will be interesting to see how this plays out.  It has been a long ride down for bondholders and as things sit right now, the potential for upside seems limited.

Disclosure: NatAlliance Securities LLC may hold a position in all bonds referenced, and in the future may be a buyer or a seller of the securities. This is not a recommendation to buy, sell, or hold the securities. Las Olas Wealth Management is a wealth management group within NatAlliance Securities LLC.: I, Dean Myerow, wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock or bond is mentioned in this article.




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