ot- MIR--Not As Gloomy As It Looks
Richard Lehmann, Forbes/Lehmann Income Securities Investor, 06.05.03, 4:00 PM ET
Mirant has just been a font of bad news for the last year and a half, brought about by circumstances not entirely of their making. First it was clobbered by being in the merchant energy business alongside Enron. Then Mirant's debt ratings imploded as the company found itself involved in 20 power plant construction projects needing billions of dollars in capital to complete. Then Mirant discovered some accounting problems (which proved to be minor) at a time when any discrepancy was the kiss of death for equities. In fact, speaking of kiss of death, their auditors were none other than, you guessed it, Arthur Andersen.
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Given all the above, it is somewhat of a miracle that it has survived. Mirant's year-end accounts were released only last month after a re-audit of the last three years with new accountants who cut the company no slack. Hence, going-concern reservations were expressly stated in the auditors' opinion despite the fact that other utilities in similar straits showed no such reservations from their new auditors.
To finally bring this saga to an end, the company is currently negotiating with its banks for a five-year renewal of its bank lines. Concurrent with this Mirant is offering to exchange three debt issues at par for a new secured issue due in 2008 and paying 7.5%. The exchange should be wildly popular the banks given that having a collateralized claim is way better than what they have now.
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In one instance, the holders of $750 million of a 2.5% busted convertible bond due in 2021 are being offered the secured bond at par. The reason this almost-free money debt is being replaced is that in 2004, the issue can be put back to the company and it must be paid in cash or stock. Since the company cannot come up with this amount of cash, Mirant would have to issue at least 250 million shares of stock at current prices (it has only 400 million shares outstanding now). Short-selling in anticipation of such an event would probably drive the price down even further, creating a financial nightmare for shareholders. Another provision in this debt issue would have required Mirant to redeem the bonds for cash in case of a merger, a non-starter for any such deal.
While the exchange should go through smoothly, the company is taking no chances. It has threatened a pre-packaged Chapter 11 bankruptcy filing if it doesn't get 85% acceptance. This bankruptcy talk is standard practice for companies who have little else to convince bondholders to accept. It may be overkill in this case, since what is being offered bondholders is a gift even if the new bonds won't exactly trade at par.
The uncertainty in this reorganization is getting the banks to renew the credit lines. This should not be a problem given that Mirant will end up collateralized versus its current unsecured position today. The main sticking point seems to be that two banks want all the collateral and don't want to share with the recipients of the new secured bonds. My guess is they will give in at the end since the thought of going into bankruptcy court with matters as they stand now has to be a banker's worst nightmare.
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