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Rating Action:

Moody's downgrades GenOn REMA to B1; affirms GenOn's ratings with a negative outlook

06 Jul 2012

Approximately $6 billion of securities affected.

New York, July 06, 2012 -- Moody's Investors Service today downgraded the senior secured pass-through certificates of GenOn REMA, LLC (GREMA) to B1 from Ba1 concluding the rating review that commenced on December 16, 2011. Concurrent with this rating action, Moody's affirmed the Corporate Family Rating and Probability of Default Rating of GenOn Energy, Inc. (GEN) along with GEN's B3 senior unsecured rating. As part of this rating action, Moody's revised GEN's Speculative-Grade Liquidity rating to SGL-2 from SGL-1 and also upgraded the GEN's senior secured revolver and term loan to B1 from B2. Debt instrument ratings at GenOn Americas Generation, LLC (GENAG, B3 Senior Unsecured) and at GenOn Mid-Atlantic, LLC (GENMA, Ba1 Senior Secured) are also affirmed. The rating outlook for GEN, GREMA, GENMA, and GENAG is negative.

RATINGS RATIONALE

"Low gas prices combined with stricter environmental regulations continue to create headwinds for the GenOn family and especially for GREMA, which will depend on cash injections by its parent to fund mandated environmental retro-fits over the next several years. A prolonged period of projected negative free cash flow at GREMA along with the announced deactivation/retirement of 68% of its base-load generating assets outweigh the structural protections of the lease. GREMA's reliance on GEN for capital injections lead us to move GREMA's rating closer to GEN's Corporate Family Rating," said Bill Hunter, VP and Senior Analyst. "Notwithstanding this stress, we view the parent's willingness to invest in the GREMA portfolio as a credit positive for the long-term viability of certain of its assets."

"Overall, GEN's good liquidity (including $1.7 billion of unrestricted cash at 3/31/12) continues to be an important support for its ratings during the current period of low natural gas prices," Hunter continued. "The revision of the liquidity rating to SGL-2 is based on our belief that, while GEN is likely to meet its obligations over the next 12 months from internal sources, the company may rely on external sources of committed financing, including the Marsh Landing project loan facility. In light of expected near-term negative free cash flow, we anticipate that the level of unrestricted cash will decline over time and view the degree of cash burn as an important future determinant for the ratings."

GEN's B2 Corporate Family Rating is based on a diversified portfolio of power plants, a meaningful percentage of hedged and contracted revenues, an apparently successful merger integration, and the combination of good liquidity and the stated importance of liquidity to senior management. These positive factors are balanced against high leverage, dependence on coal fired power plants in PJM for a majority of cash flows, volatile power prices that have been in a trough over the past six months due to the impact of shale gas, markedly decreased generation during the same period, and substantial announced plant retirements and deactivations due to increasingly stringent environmental regulations.

Following our loss given default (LGD) methodology, the rating upgrade of GEN's senior secured revolver and term loan to B1 from B2 reflects a reassessment of the collateral that secures the revolver and term loan, as compared to the outstanding indebtedness under those obligations and relative to the assets that support other parts of the financial structure. Changing industry trends, including increased capacity factors at gas-fired plants, announced plant retirements and more robust RPM auctions in PJM West were factors that led to this reassessment concerning the power plants that are pledged to GEN's senior secured creditors.

Moody's notes that our LGD methodology is based on an assessment of the relative priority of creditor groups within the family's financial structure while assuming an average recovery percentage for each industry, and it does seek to provide a valuation of specific collateral or pools of power plants. For the GenOn family the final LGD ratings are also based on single-notch adjustments to the LGD model (upward for GEN unsecured, GENMA and GENAG, downward for GEN secured and GREMA) based on factors including historical and expected stand-alone cash flow generation at the unit or its direct subsidiaries, hedging at the unit, the need for parental support to meet financial obligations, and the need to provide support to subsidiaries.

The negative outlooks for GEN, GENMA, GENAG and GREMA reflect the impact of shale gas on power prices, the potential for a long-term compression of coal fired generators' gross margins, and the potential for further environmental regulations, while acknowledging that GEN has prepared itself to withstand a multi-year period of low power prices by husbanding its liquidity and reducing costs, and that parts of its fleet are relatively well positioned in terms of location and environmental compliance. While forward curves indicate an expectation of higher power prices in the future, if these higher prices are not realized in the next 12-18 months, negative ratings actions could result.

Ratings Downgraded

Issuer: GenOn REMA, LLC

Senior Secured: B1, LGD 3 -- 32% from Ba1, LGD 2 -- 15%

Outlook: Revised to Negative from RUR-Down

Ratings Upgraded

Issuer: Genon Energy, Inc.

Senior Secured: B1, LGD 3 -- 32% from B2, LGD 3 -- 45%

Senior Secured Bank Facility: B1, LGD 3 -- 32% from B2, LGD 3 -- 45%

Outlook: Negative

Ratings Affirmed; Revised Speculative-Grade Liquidity Rating:

Issuer: Genon Energy, Inc.

Corporate Family Rating: B2

Probability of Default Rating: B2

Senior Unsecured: B3

Speculative-Grade Liquidity Rating: Revised to SGL-2 from SGL-1

Outlook: Negative

Ratings Affirmed:

Issuer: GenOn Americas Generation, LLC

Senior Unsecured: B3

Outlook: Negative

Issuer: GenOn Mid-Atlantic, LLC

Senior Secured: Ba1, LGD 2 -- 15%

Outlook: Negative

LGD Point Estimates Adjusted:

Issuer: Genon Energy, Inc.

Senior Unsecured: Adjusted to LGD 5 -- 77% from LGD 5 -- 73%

Issuer: GenOn Americas Generation, LLC

Senior Unsecured: Adjusted to LGD 5 -- 77% from LGD 5 -- 73%

In light of the negative outlook, limited prospects exists for GEN's ratings to be upgraded in the intermediate term. Longer-term, GEN's ratings could be upgraded if there were a material improvement in forward capacity prices and/or energy prices (and especially the dark spread) that could be locked in, such that CFO pre-WC/Debt would be expected to exceed 10% and FCF/Debt would be expected to be flat or positive on a sustainable basis.

GEN's ratings could be downgraded if power prices experienced over the past 6 months were to continue at or about the same levels for the next 6-12 months with no expectation of subsequent material improvement, if environmental regulations were to materially increase/accelerate Capex or expected plant shutdowns, if the liquidity cushion were materially eroded or management were to change its policy of maintaining sufficient liquidity. In addition, ratings could be downgraded if our expectation of sustained cash flows were to change, such that CFO pre-WC/Debt would be expected to be lower than 5% and FCF/Debt would be expected to be negative 10% or worse on a sustained basis.

GenOn Energy Inc., based in Houston, Texas, is a US merchant power holding company that was formed in December, 2010 from the merger of Mirant Corporation and Reliant Resources Inc.

The methodologies used in this rating were Unregulated Utilities and Power Companies published in August 2009, Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009 and Speculative Grade Liquidity Ratings published in September 2002 . Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

William Hunter
Vice President - Senior Analyst
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

A.J. Sabatelle
Senior Vice President
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 REMA to B1; affirms GenOn's ratings with a negative outlook
No Related Data.
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