Management Accounting

Did Reliant’s Ending of Merrill Deal Create a Default?

Termination of a $300m working capital facility by the energy company is alleged by the investment bank to constitute a default on another agreemen...
Stephen TaubDecember 30, 2008

Merrill Lynch is suing Reliant Energy for terminating a $300 million working capital facility, but Reliant challenges the investment bank’s assertion that the termination constitutes a default of a second agreement between the two companies.

In an action filed in New York State Supreme Court, Merrill Lynch asserted that Reliant had no right to terminate, without Merrill’s consent, the working capital line under the so-called credit sleeve and reimbursement agreement (CRSA) between Merrill Lynch and certain Reliant Energy affiliates. As a result, Merrill claims the termination is an act of default.

Merrill, in claiming a default by Reliant, said that Merrill will continue to perform under the CSRA, and will provide credit enhancement to Reliant related to the conduct of its retail energy business, according to a regulatory filing. It also said in its lawsuit that a prompt resolution of the dispute is essential, because Reliant had earlier announced that it was in discussions to sell all or parts of its business, including the retail energy business.

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Reliant contends that the termination of the working capital facility without consent does not constitute a default, and that the investment bank has no right to exercise any of their remedies under the CSRA. “We believe that we have the right to terminate the Working Capital Facility,” Reliant said in a regulatory filing. It added that the facility expressly provides that Reliant may at any time terminate the facility. “We intend to vigorously oppose the Merrill Lynch action,” Reliant said.

If Merrill’s action for declaratory judgment is successful, said Reliant, the bank could seek to exercise remedies under the CSRA, including seeking to foreclose on its collateral under that arrangement. But Reliant added that if such an action were successful, it would not have a material impact on Reliant’s wholesale business.

Reliant noted that results in its retail energy segment in 2008 have come in well below expectations as a result of a number of factors, including the record heat in the Houston area, the devastating impact of Hurricane Ike on the Gulf Coast, and the significant volatility in commodity prices experienced in 2008.

As a result, it felt amending or terminating its $300 million working capital facility with Merrill could be appropriate in order to address any issue that might be claimed related to the minimum adjusted retail EBITDA covenant in that facility.