Mirant ( MIR) is using its monstrous debt load as a weapon.

The cash-strapped power provider is essentially threatening to file for bankruptcy protection if its stubborn lenders refuse to bend. The company said it needs unanimous support from its bank lenders -- including two current holdouts -- to avoid a prepackaged bankruptcy plan that would hurt all investors except its bondholders.

Mirant is floating a plan that would place bankers and bondholders on equal footing if they provide the $4.9 billion in financing the company needs to avert bankruptcy. The plan includes a $1.45 billion bond swap and provides brand-new security for all creditors involved. But the company, feeling resistance from its bank group, has asked bondholders to go ahead and approve a prepackaged bankruptcy in case its preferred plan falls through.

"After a great deal of analysis, we concluded that this bond debt restructuring, coupled with a concurrent bank debt restructuring, is the best way for all of our creditors to receive full payment for what we owe them, while taking steps to preserve value for our shareholders," said CEO Marce Fuller. "Our strong preference is to do this out of court -- and we are hopeful we can do so."

But the stock tanked on the news. Shares of Mirant tumbled 16%, falling 53 cents, to $2.87. Fresh bankruptcy fears put pressure on the entire merchant energy group, interrupting a strong rally that had doubled Mirant's share price in recent months.

Strong on the Glass

But some, including Blaylock analyst Lasan Johong, viewed Mirant's setback as temporary and predicted a rebound for the stock. He downplayed any real chances of bankruptcy, saying that Mirant is simply taking a "negotiating stance" with its creditors. He expects bondholders to approve both the swap and the prepackaged bankruptcy. And in an effort to avoid a "cram-down" reorganization plan, he believes the bankers will hammer out a deal with Reliant, possibly offering lower interest rates in exchange for shorter maturities that will ensure that the banks get paid off first.

"That's a fairly good compromise," said Johong, who recommends buying the stock but owns no shares himself. "This is a good deal for everybody."

One industry expert compared the situation to another -- also featuring a bond swap and possible bankruptcy -- that turned out favorably for the company.

"It is very similar to what AES ( AES) did," the fund manager said. This "creates a situation where the banks really have to deal or potentially lose out."

After long and tense negotiations, AES finally landed a deal that saved the company from bankruptcy and sent its shares soaring. The stock, which dipped below $1 last October, has since rocketed above $8 as liquidity fears have abated. The stock was off less than 1%, slipping 10 cents to $8, after Tuesday's news from Mirant.

Fear of Failure

Still, industry veteran Karl Miller remains unimpressed by the sector's gains. Miller is convinced that many energy merchants -- including Mirant -- will ultimately fail.

"The creditors to the power industry are not fixing the fundamental problems," said Miller, who leads an energy-related acquisition firm. "The banks need to take these companies off life support and take their losses."

But for now, negotiations continue. Mirant is offering to replace $1.45 billion worth of convertible debentures and unsecured notes for new senior notes backed by security. Simultaneously, the company is negotiating with its bank group to replace $3.45 billion worth of credit facilities with newly secured revolving and term loan credit lines.

To succeed with its preferred plan, Mirant needs support from 85% of its bondholders and all of its bankers. In contrast, the company needs support from only two-thirds of its bondholders and half of its bank group to pursue a prepackaged bankruptcy.

The bond swap -- which would prevent the bankruptcy -- depends on successful refinancing of Mirant's bank debt. So far, the company has reached no agreements with its bank lenders. Last week, however, it secured an extension of a waiver agreement that allows bank negotiations to continue through July 14. The bond swap offer is scheduled to expire 17 days before then.

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