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Rating Action:

Moody's Downgrades GenOn Energy's CFR to Caa2; Outlook Negative

21 Mar 2016

Approximately $4 billion of debt affected

New York, March 21, 2016 -- Moody's Investors Service, ("Moody's") today downgraded GenOn Energy, Inc.'s (GenOn) corporate family rating (CFR) and probability of default (PD) rating to Caa2, from B3, and Caa2-PD from B3-PD, respectively. GenOn's Speculative Liquidity Rating (SGL) has also been revised to SGL-4 from SGL-3. At the same time, we downgraded the senior secured ratings of its GenOn Mid-Atlantic, LLC (GenMA) subsidiary to B2, from Ba3, downgraded GenOn Americas Generation, LLC's unsecured rating from Caa1 to Caa2 and affirmed its GenOn REMA, LLC (REMA) subsidiary's senior secured rating at B2. See below for a complete list of all the rating actions. The outlook remains negative. The rating downgrades and affirmation follow our assessment of the US merchant power sector in the wake of a sustained period of low commodity prices, including natural gas and electricity.

Downgrades:

..Issuer: GenOn Americas Generation, LLC

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2 from Caa1

..Issuer: GenOn Energy, Inc.

.... Probability of Default Rating, Downgraded to Caa2-PD from B3-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-3

.... Corporate Family Rating, Downgraded to Caa2 from B3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2 from B3

..Issuer: GenOn Mid-Atlantic, LLC

....Senior Secured Pass-Through, Downgraded to B2 from Ba3

Outlook Actions:

..Issuer: GenOn Americas Generation, LLC

....Outlook, Remains Negative

..Issuer: GenOn Energy, Inc.

....Outlook, Remains Negative

..Issuer: GenOn Mid-Atlantic, LLC

....Outlook, Remains Negative

..Issuer: GenOn REMA, LLC

....Outlook, Remains Negative

Affirmations:

..Issuer: GenOn REMA, LLC

....Senior Secured Pass-Through, Affirmed B2

RATINGS RATIONALE

"GenOn has an untenable capital structure and is facing an extended period of cash flow deficit, which is calling into question the sustainability of its business model", said Toby Shea, Vice President -- Senior Credit Officer. "GenOn's two ring-fenced entities -- Mid-Atlantic and GenOn REMA -- are not distressed but had a large fall in cash flow for 2015. We, however, only downgraded GenOn Mid-Atlantic because GenOn REMA's has a relatively low amount debt to asset value."

GenOn's Caa2 CFR largely reflects its high debt burden relative to cash flow. The default risk at the parent company is exacerbated by dividend restrictions at its two ring-fenced subsidiaries: GenMA and REMA. The ring-fenced entities currently generate about 70% of consolidated cash flow but only hold around 25% of the debt whereas the rest of the company generates about 30% of the consolidated cash flow but account for 75% of the consolidated debt. More specifically, we estimate that GenOn averaged about $438 million of open EBITDAR annually over the past five years (2011-2015) and had a total adjusted debt and lease obligation of $4 billion at the end of 2015. GenMA and REMA, combined, contributed about $304 million of open EBITDAR with $1 billion of debt and lease obligations.

GenOn's downgrade reflects our concern regarding the company's ability to meet its upcoming bond maturity in 2017 under the current difficult industry and capital market environment. We recognize that GenOn has made progress in selling assets and reducing debt through buybacks, but there is a clear potential for default or distressed exchange to keep the company out of bankruptcy. Though GenMA and REMA are not distressed entities on their own, we have downgraded them to reflect the large drop in cash flows registered for both entities in 2015, and the small potential that should GenOn files for bankruptcy, it could also pull GenMA and REMA into bankruptcy.

Natural gas prices in the United States are at historic lows; after declining sharply to the $3/MMBtu range at Henry Hub near the end of 2014, the downward slide continued with current pricing under $2/MMBtu in most markets. Forward curves remain upward sloping, with prices returning above $2/MMBtu in 2016; however, most indications remain below $3/MMBtu for the foreseeable future. Moody's is currently assuming average pricing of $2.25/MMBtu in 2016 and $2.50 MMBtu in 2017. While low natural gas prices do not necessarily translate directly into lower power prices, particularly in the PJM Interconnection (PJM, Aa3 stable) where there are delivery constraints and a meaningful amount of power is still produced by coal-fired generating plants, they do tend to move together.

Our ratings also factor in NRG's approach in managing GenOn as a non-recourse subsidiary. We don't believe that NRG will develop new projects at GenOn and will only inject capital if the return justifies the incremental investment. Based on current forecasts, GenOn without its ring-fenced subsidiaries is expected to produce operating cash flow of about negative $33 million a year and maintenance capital expenditure of $45 million per year. There is also significant environmental capital expenditures in 2016. On the other hand, GenMA and REMA are projected to generate $90 million and $35 million a year of operating cash flow with maintenance and environmental capital expenditure of $47 million and $20 million a year, respectively. REMA, however, also has a sizeable growth capital expenditure associated with the gas conversion of the Shawville coal plant in Pennsylvania.

Liquidity Profile

GenOn is actively selling assets and reducing debt but it is not clear that these efforts will be adequate to avoid a default or a distressed exchange in the next 12 to 18 months. At yearend 2015, the company had $174 million of unrestricted cash on hand and $222 million of availability under its revolving credit facility. Asset sales proceeds should add another $138 million in the first quarter of 2016. However, its cash flow drain is also daunting -- a negative $104 million a year of cash flow from internal operations in 2015 - and a $714 million debt maturity in 2017 followed by another $708 million in 2018.

Rating Outlook

GenOn's negative outlook reflects the potential for default or distressed exchange as its 2017 debt maturity comes due.

What can change the rating up

We could stabilize the outlook should the company manage to refinance its 2017 and 2018 debt maturities without going through a distressed debt exchange. An upgrade would require a material improvement in the industry fundamentals, which we do not foresee at this point.

What can change the rating down

We may downgrade GenOn further if we believe that a default or a distressed exchange has become more imminent.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Toby Shea
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades GenOn Energy's CFR to Caa2; Outlook Negative
No Related Data.
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