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Edison Mission high yield bonds slide on PJM auction results

Bonds backing Edison Mission fell in value this week following disappointing results of the annual PJM capacity auction, according to sources. The news comes amid the mobilization by bondholders and the company in hiring restructuring and recapitalization advisors.

The company’s $1.2 billion issue of 7% notes due 2017, the most liquid issue, has shed about three points since Friday, to a 59 area by yesterday, sources said. The all-time low print was 55 in January. But the most telling indicator was the drop in the company’s 7.5% notes due 2013, which hit all-time lows at 65 yesterday, compared with above 70 on Friday. The CCC+/Caa1 senior notes have passed March 2009 credit-crisis lows and show more than a 30-point decline since December.

The 2013 paper has shown a greater decrease due to the expectation that the earlier maturity makes it much less likely to be paid off by the maturity date, according to sources.

The PJM auction establishes contracts with power producers who commit to make their facilities available to provide electricity for the PJM system for the delivery year. This year, the auction procured 164,561 megawatts of capacity resources at a base price of $136 per megawatt. Since people were expecting that price to be roughly $30 higher, the market had to adjust expectations for Edison’s cash flows down as much as $50 million, according to sources. The PJM release noted that capacity prices were higher than last year’s because of retirements of existing coal-fired generation resulting largely from environmental regulations.

In the first quarter conference call, the company’s CEO Ted Craver said that the company might have to financially restructure or reorganize its Edison Mission generation unit. And indeed, the company recently hired Kirkland & Ellis and Moelis to assess its options, while bondholders have retained Houlihan Lokey and Ropes & Gray, according to Debtwire reports.

The company had $4.9 billion in long-term debt as of March 31, according to its quarterly filing.

Standard & Poor’s downgraded Edison at around the same time as Craver’s comments, noting the heightened risk that the company would be unable to refinance the $500 million in notes due June 2013 on reasonable terms.

Edison Mission Energy develops, acquires, owns, and operates electric power generation facilities.

The company’s various bond issues date to May 2007 issuance as part of an existing-bond refinancing program. The paper due next year was issued in 2006 for the same purposes. – Max Frumes

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