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Rating Action:

Moody's downgrades GenOn Energy to Caa3, Outlook Negative

07 Oct 2016

New York, October 07, 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 Caa3 from Caa2, and Caa3-PD from Caa2-PD, respectively. At the same time, we downgraded the ratings of GenOn REMA, LLC (REMA) and GenOn Mid-Atlantic, LLC (GenMA)'s pass-through certificates to Caa1 from B2. See below for a complete list of all the rating actions. The outlook remains negative.

"The rating downgrade reflects an increasing likelihood of a GenOn default, possibly as soon as June 2017," said Toby Shea, Vice President -- Senior Credit Officer "A default at GenOn creates contagion risk for REMA and GenMA, but we see good recovery values at those entities."

RATINGS RATIONALE

GenOn's Caa3 Corporate Family Rating (CFR) largely reflects its high debt burden relative to cash flow and the relatively high risk of default. The default risk at GenOn is exacerbated by dividend restrictions at its GenMA and REMA subsidiaries. These two entities currently generate about 65% of consolidated cash flow but only hold around 25% of the consolidated debt whereas the rest of the company generates about 35% of the consolidated cash flow but accounts for 75% of the consolidated debt.

Moody's estimates 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 $3.6 billion ($4 billion with debt premiums) at the end of 2015. On the other hand, GenMA and REMA combined contributed about $283 million of open EBITDAR with $1 billion of debt and lease obligations. Without the cash flows from its dividend-restricted entities, GenOn's debt level is unsustainable.

A default or debt restructuring is likely over the next two years due to two upcoming bond maturities at GenOn -- $691 million in June 2017 and then another $650 million in October 2018. Moody's estimates that GenOn can probably refinance its 2017 maturity with available secured debt capacity, but that would only put off the resolution of its untenable debt structure for another year or so when its next bond maturity becomes due in October 2018.

In an event of a GenOn bankruptcy, Moody's cannot rule out that GenOn may attempt to file all its subsidiaries into bankruptcy, including REMA and GenMA. Moody's views the ring-fence type provisions at REMA and GenMA as mostly related to dividend restrictions, which offer little or no protection from a parent bankruptcy. The entities do not have independent directors on the board to vote against a bankruptcy decision. Moreover, the arguments in favor for filing these entities have strengthened given the deteriorating plant economics in the past few years.

REMA and GenMA's pass-through certificates are rated Caa1, which are two notches higher than GenOn's unsecured debt ratings of Caa3. The higher rating reflects Moody's belief that in a bankruptcy scenario, due to the direct and indirect secured interest of the lease structure on all of REMA and GenMA's plants, respectively, the pass-through certificates will rank ahead of both the lease equity and any affiliate claims from GenOn. Moreover, Moody's estimates that the REMA and GenMA's plants are worth in excess of their lease debt balances, valuing REMA plants at $139/kW and GenMA, $125/kW. In comparison, the lease debt balance on REMA and GenMA are only $99/kW and $92/kW, respectively.

GenOn's speculative liquidity rating (SGL) is 4, the weakest rating possible on Moody's scale. With the dividend restrictions firmly in place at REMA and GenMA, GenOn will likely generate substantial negative free cash flows for the foreseeable future. It may have just enough secured debt capacity to refinance its 2017 bond maturity, but it will not have enough for the 2018 bond maturity.

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

The outlook could be stabilized 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 industry fundamentals, which is not expected at this point. A further downgrade is possible if a default or a distressed exchange takes place.

The following rating actions were taken:

Downgrades:

..Issuer: GenOn Americas Generation, LLC

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 from Caa2

..Issuer: GenOn Energy, Inc.

.... Probability of Default Rating, Downgraded to Caa3-PD from Caa2-PD

.... Corporate Family Rating, Downgraded to Caa3 from Caa2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 from Caa2

..Issuer: GenOn Escrow Corp.

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 from Caa2

..Issuer: GenOn Mid-Atlantic, LLC

....Senior Secured Pass-Through, Downgraded to Caa1 from B2

..Issuer: GenOn REMA, LLC

....Senior Secured Pass-Through, Downgraded to Caa1 from B2

Outlook Actions:

..Issuer: GenOn Americas Generation, LLC

....Outlook, Remains Negative

..Issuer: GenOn Energy, Inc.

....Outlook, Remains Negative

..Issuer: GenOn Escrow Corp.

....Outlook, None

..Issuer: GenOn Mid-Atlantic, LLC

....Outlook, Remains Negative

..Issuer: GenOn REMA, LLC

....Outlook, Remains Negative

Affirmations:

..Issuer: GenOn Energy, Inc.

.... Speculative Grade Liquidity Rating, Affirmed SGL-4

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

Headquartered in Houston, Texas, GenOn Energy, Inc. is an unregulated merchant power subsidiary of NRG Energy, Inc.

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

Jim Hempstead
Associate Managing Director
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

No Related Data.
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