Mirant plans convertible, about $375 million, perhaps this week, to reduce revolver

By Ronda Fears

Nashville, Tenn., June 24 - Mirant Corp. said on a conference call Monday that it will sell a convertible in the neighborhood of $375 million perhaps as early as this week.

Proceeds would be used to pay down its $1.125 billion bank revolver that matures July 17, which is currently in negotiations for amendment.

Ray Hill, CFO of Mirant, said the company presently has a proposal in front of its bank group for a reduced revolver size with an additional one-year term out provision that would extend the final maturity to 2004.

"This proposal offers our banks an improvement in pricing and some tightening of terms without making any fundamental changes to conditions," Hill said.

"For instance, no security is being offered in this proposal."

He said terms would likely tighten at least by 100 basis points.

If there are not enough early commitments from the banks on the proposal, Hill said Mirant would term out the revolver and continue to work on a reduced facility. He said commitments are coming in and the company expects to know by early July which approach it will be taking on the revolver.

"In any event, we anticipate a capital markets issuance very soon, potentially this week, that will allow us to reduce our dependence on bank financing going forward," Hill said, noting that in turn, "banks want to reduce their exposure to this [energy and power] sector."

He said the company is planning to issue a convertible, perhaps a convertible bond rather than the mandatory structure that has been in vogue of late.

Mirant has a 2.5% convertible bond due 2021 outstanding and a 6.25 % convertible trust preferred.

The 2.5% was down 0.75 point to 74.375 bid and the 6.25% was off 0.5 to 31.75 bid.

Mirant shares closed down 53c to $8.17.

"This capital markets issuance would allow us to reduce the existing bank revolver to roughly two-thirds of its current size without reducing our total liquidity," Hill said.

"If we elect to term out the revolver, the proceeds from the issuance could provide an additional liquidity cushion though the summer if we so desire."

Hill said Mirant at May 31 had $1.3 billion in available cash and credit lines, and expects to end the year with $1.4 billion in total liquidity.

Fitch on Monday lowered its ratings on Mirant Corp., including the convertible senior notes to BBB- from BBB and convertible trust preferreds to BB from BBB-.

S&P also had Mirant's senior debt at BBB-, and Hill said the company is in discussions with Moody's that should result in some rating action by third quarter.

Also, Mirant is discussing plans to create a separate unit for its energy trading and risk management operations, in order to reduce the company's exposure to that segment of the industry.

"We are focused on finding a cost-effective solution that will both reduce the collateral requirements in the business and give us the capability to capture a larger share of the longer-term structured market without negatively affecting our ability to execute our integrated business model," Hill said.

"We are working with a financial institution to provide a layer of this capital for a fee, rather than as a direct equity investment or in the form of a joint venture.

"We believe that this could be a more efficient vehicle in which to capitalize our trading business. It would allow us to better predict our collateral needs and to more easily change our portfolio mix to respond to market changes that impact our collateral demands."

He said the company plans to create a separate, bankruptcy remote subsidiary that would be separately capitalized and have its own credit rating - now targeted at A-minus. There would be a layer of base capital, he said, plus a fluctuating amount based on the underlying trading book.

It's not that energy trading volumes are not appealing, rather the opposite.

Mirant CEO Marce Fuller said better marketing volumes for electricity and natural gas were the main drivers that lead the company to up its guidance for second quarter.

Mirant now sees second quarter EPS of 35c versus the previous guidance of 30c, Fuller said in the conference call, citing strong energy marketing volume despite the scaling back of operations by other traders.

The company left its 2002 earnings projection at $1.60 to $1.70 a share, however.

"Mirant continues to execute and perform very well in a tough market environment," Fuller said.

"We're staying focused on the things we can control, executing the plan we outlined earlier this year and achieving our results in the right way."

Of the $1.6 billion in asset sales discussed in January, she said, some $1.4 billion have already been accomplished.

Fitch noted that in the past six months, Mirant has strengthened its balance sheet by issuing $759 million of equity, reducing capital expenditures and operating expenses and assets sales.

But, Fitch said the downgrade reflects that, despite these favorable developments, consolidated debt leverage ratios remain high.

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