Bangkok--31 Jan--S&P Global Ratings
NEW YORK (S&P Global Ratings) Jan. 30, 2020--S&P Global Ratings today took the rating actions listed above.
Because of recent underperformance and continued unfavorable market conditions in Pennsylvania of PJM, Panda Patriot LLC is susceptible to another financial covenant breach in the near term, and we view its refinancing risk as heightened, with our estimate of $535 million due by year-end. Patriot breached its financial covenant in Q4 2019, and it subsequently exercised an equity cure to rectify the breach. We had anticipated this event and lowered the debt rating in Q3 2019 to indicate the possibility of violating the quarterly financial covenant test (Panda Patriot LLC Debt Rating Lowered To 'B-' On Increased Likelihood Of Near-Term Covenant Breach; Outlook Negative, Sept. 18, 2019). We expect Patriot's cash flow generation will remain challenged over the next 12 months; day-ahead prices have been weak in several PJM regions: on-peak prices in the low-to-mid-$20s per megawatt-hour (MWh); cleared PJM capacity prices for the 2019-2020 and 2020-2021 delivery years are relatively low in the Mid-Atlantic Area Council region; and PJM will remain in an oversupply state for the foreseeable future. On the operational front, we know there is planned transmission work in Patriot's vicinity, and that may occasionally affect its ability to dispatch. Despite the weak market fundamentals, we do not believe a majority of PJM natural-gas-fired power assets will underperform this year; other factors need to be considered, including downside protection through properly structured financial hedges, the power plant's proximity to load zones, debt on balance sheet, and operational performance.
The CreditWatch developing placement reflects that we may raise or lower our debt rating on Patriot depending on the outcome of its refinancing efforts in the near term. The outcome may be contingent on if the company sells equity interests in the asset.
We could raise our debt rating if Patriot successfully refinances the upcoming maturity. This would be predicated on the level of debt under the new capital structure and the amount of cushion in its debt service coverage.
We could lower our debt rating further over the next several months if believe Patriot cannot refinance the upcoming maturity, thus increasing the risk of payment default. We could also lower our rating if other default events occur. This could include Patriot again breaching the financial covenant in the first half of 2020 and not exercising the remaining equity cure rights permitted under the existing credit agreement.