20 November 2020 by jbchevrel
FirstEnergy Corp. (FE) operates as a public utility holding company generating and distributing electricity. It also offers exploration, production, and distribution of natural gas. FE CDS is a constituent of CDX IG index since series s04. In July 2020, the FE CDS premium tripled in one day from about 20bp (In 2019 FE increased Cash Reserves +60%=+$250M, stable cash flow, reasonable dividend) to 60bp. FE said it received subpoenas in connection with the investigation surrounding Ohio House Bill 6. There were accusations of bribery involved in the passage of the bill, with some suggesting illicit payments may have gone as high as $60M. Then, this autumn, FE fired CEO Jones and other senior executives (senior VP of product development, marketing, and branding & senior VP of external affairs) after a board review set up in the wake of a federal corruption scandal found they violated the company’s policies and its code of conduct. The FE CDS came from 70bp to about 100bp, on that. Today Fitch Ratings downgraded the LT IDR of FE to BB+ from BBB-. This rating action reflects recent disclosure of a $4.3M payment from FE to an individual who is now a government official involved in regulating FE's Ohio-based utility distribution subsidiaries. Fitch believes the disclosure significantly deepens regulatory, political, legal and liquidity risks already heightened by investigations underway at the Department of Justice (DOJ) and SEC. The $4.3M payment was made in early 2019. The FE CDS came from about 100bp to 132bp, on that last development. For reference, at the moment the CDX IG fair spread is 57bp, BBB’s is 67bp, BB’s is 193bp and CDX HY’s is 338bp. FE CDS has widened by ‘plateaux’ since this summer.