Brazos Electric Power Cooperative joined a rare club of investment-grade companies that filed for bankruptcy after the Texas power firm collapsed under a brutal winter storm, highlighting the growing risk of climate change.
In Wall Street parlance, they’re known as “failing angels,” a play on the more common “fallen angels” tag for debt issuers that get downgraded to junk. In those cases, managers still have time to turn things around, and investors who can’t tolerate the risk have months or years to get out. For companies like Brazos that get caught in sudden calamities, the fall from grace can be a matter of days.
Brazos — which carried an A+ grade from Fitch Ratings — would be the first failing angel since PG&E Corp., which went bankrupt in 2019 to manage more than $30 billion in liabilities from the California wildfires. While both companies saw their fiscal woes fueled by extreme weather, previous failing angels have been connected to wider financial crises or individual scandals.
Failed Angels
Brazos among the few investment-grade companies to default since 2000
Source: Bloomberg
Note: Aproximate debts at time of bankruptcy filing shown
The California wildfires were a known risk for PG&E, but the prolonged freeze and energy crisis was a surprise for Brazos. Investors and credit raters likely will need to pay more attention to such scenarios in the future, according to Bloomberg Intelligence credit analyst Jaimin Patel.
“Surprise events like this make everyone more cognizant of the potential risk involved with utilities,” which are typically considered safe investments, he said in an interview.
Brazos became a failing angel Monday after seeking Chapter 11 in Houston to address an estimated $2.1 billion in electricity charges stemming from last month’s freeze, which decimated the otherwise robust balance sheet of the Waco-based generation and transmission company.
Black Swan
Fitch said in a June report that Brazos did business in a “low operating risk” environment with low energy costs. Nevertheless, the company said it had “no choice” but to file for bankruptcy because the charges it owed to the Texas electricity grid operator far outpaced available liquidity.
“Brazos Electric will not foist this catastrophic ‘black swan’ financial event onto its members and their consumers,” the company wrote in court documents.
Pedestrians wearing protective masks cross a snowy street in Austin on Feb. 17.
Photographer: Thomas Ryan Allison/Bloomberg
Climate-change risk is becoming increasingly relevant to investors, banks and ratings firms due to the potential for catastrophic damage and economic losses. Companies have $7.2 trillion of debt with “high inherent exposure to physical climate risks,” like wildfires or storms, out of $79 trillion of debt with credit risk linked to the environment, according Moody’s Investors Service.
The ratings firm said environmental effects are becomingly increasingly important to how it grades companies. Electric Reliability Council of Texas, the grid operator in the state, said last week it had started to see defaults stemming from February’s storm, which forced nearly half of power-plant capacity offline and left more than 4 million in the dark for days.
Companies seeking financing may soon feel pressure on the topic from some of their biggest would-be creditors. BlackRock Inc. recently said it preferred to invest in developed areas due to their efforts to address climate change, while Citigroup Inc.’s new chief executive officer, Jane Fraser, is pledging to achieve net-zero greenhouse-gas emissions in its financing activities by 2050.
