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S&P's view on Genesis's new bonds

Standard & Poor's has rated Genesis Energy's proposed 30-year capital bonds issue a “BB-” rating, three notches below what is usually regarded as investment grade.

Friday, April 8th 2011, 5:00AM

by Jenny Ruth

The bonds are intended to partly fund the acquisition of the Tekapo A and B hydro assets.

The international ratings agency rates Genesis itself "BBB+" but has it on negative watch.

"We classified the capital bonds as having a "high" equity content, meaning that we will treat the bonds entirely as "equity" and the coupon payments as "dividends" in our financial ratio calculations, says credit analyst Alicia Low.

Key features of the bonds include the mandatory deferral of coupon payments for up to five years if Genesis' rating falls to "BB+" or below. They will also rank behind all senior unsecured creditors including Genesis' existing retail bonds, medium-term notes and bank debt.

"Furthermore, the heightened risk of interest payment deferrals and deeply subordinated recovery position underpin our view of the four-notch differential between the 'BB-' rating on the capital bonds and Genesis Energy's stand-alone credit profile," Low says.
However, the mandatory deferral of interest payments "supports the issuer's credit quality because of the retention of cash in the company, which would have otherwise been used to pay interest on the capital bond."

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