Fitch Downgrades Dynegy Holdings' IDR to 'D'; Places DYN on Rating Watch Evolving

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Dynegy Holdings, LLC (DH) to 'D' following its bankruptcy filing. Based on an updated recovery analysis, Fitch has upgraded DH's unsecured bond ratings to 'CCC/RR2' from 'CC/RR4' and subordinated capital trust securities ratings to 'C/RR5' from 'C/RR6'.

In addition, Fitch has revised the Rating Watch on Dynegy Inc's (Dynegy) 'CC' IDR to Evolving from Negative. Fitch has also placed the IDRs and security ratings for Dynegy Power, LLC (GasCo) and Dynegy Midwest Generation, LLC (CoalCo) on Rating Watch Negative. A full list of ratings actions follows at the end of this release.

DH and four of its wholly-owned subsidiaries filed for bankruptcy protection on Nov. 7, 2011. (Fitch does not rate any of the four subsidiaries.) DH also announced a restructuring agreement with a group of investors holding roughly $1.4 billion of senior unsecured DH notes, regarding a framework for restructuring DH's approximately $4.2 billion in debt obligations (the Consenting Noteholders). Under the terms of this framework, all unsecured obligations of DH i.e. $3.4 billion in senior unsecured notes, $200 million of subordinated capital trust securities, approximately $594 million in PV of future lease payments under DH's Central Hudson lease, plus accrued interest owed, would be exchanged for the following:

--$400 million cash payment;

--$1 billion in new seven-year, 11% notes issued by Dynegy that would be secured by equity interest in CoalCo and GasCo (or an additional $1 billion cash payment if more favorable financing can be obtained elsewhere);

--$2.1 billion in Dynegy's new mandatory convertible payment-in-kind (PIK) notes maturing Dec. 31, 2015.

Subordinated note holders would participate in the proposed restructuring as unsecured claims, but their recovery would be subject to enforcement of their contractual subordination to the senior unsecured notes. Alternatively, the subordinated note holders will be offered the opportunity to participate, without subordination, in the restructuring as an unsecured note holder at $0.25 for every dollar of claims.

The restructuring support agreement requires negotiation of definitive documents by Dec. 7, 2011 as well as implementation of the transaction pursuant to a Chapter 11 plan for DH, which must become effective by Aug. 1, 2012. The parties may terminate the restructuring support agreement if the definitive documents are not agreed to by the necessary majorities or if certain other milestones to consummation are not achieved. The Consenting Noteholders have also agreed to suspend their pending litigation against Dynegy.

Fitch's recovery analysis for DH's senior unsecured notes reflects an estimated enterprise value resulting from the combined equity value from the GasCo and the $1.25 billion undertaking issued by Dynegy to Dynegy Gas Investments (DGI, a subsidiary of DH)). This results in an 'RR2' recovery range (71-90%) for the senior unsecured notes and an 'RR5' recovery range (11-30%) for the subordinated capital trust securities. The recoveries reflect the liability arising from rejection of Central Hudson lease at $300 million, even though the liability could be lower if the lease was construed as true lease by the bankruptcy judge. Fitch's analysis of the terms of the restructuring agreement as described above, also result in a similar range of recoveries for the two debt classes at DH. This reflects Fitch's view of a 51-70% recovery value for the proposed mandatory convertible PIK notes.

The Rating Watch Evolving at Dynegy reflects the varying outcomes that could result out of DH's bankruptcy proceedings. A quick resolution of DH's bankruptcy proceedings with terms mirroring the restructuring agreement could potentially be a credit positive for the company. Conversely, a termination of the restructuring agreement could expose the company to a protracted and costly bankruptcy process.

The Rating Watch Negative on Dynegy Power, LLC and Dynegy Midwest Generation, LLC reflect the uncertainty around potential litigation that could arise during DH's bankruptcy proceedings that may seek to unravel the reorganization effected in July 2011, which resulted in the creation of Dynegy Coal Holdco, LLC and Dynegy Gas HoldCo, LLC and the subsequent first lien financing, or other assertions.

Fitch has taken the following ratings actions:

Dynegy Holdings, LLC.

--IDR downgraded to 'D' from 'CC';

--Senior unsecured notes upgraded to 'CCC/RR2' from 'CC/RR4'.

Dynegy Capital Trust I

--Trust preferred upgraded to 'C/RR5' from 'C/RR6'.

Fitch has revised the Rating Watch to Evolving from Negative for the following ratings:

Dynegy, Inc.

--IDR 'CC'.

Fitch has placed the following ratings on Rating Watch Negative:

Dynegy Power, LLC

--IDR 'CCC';

--Secured term loan 'B/RR1'.

Dynegy Midwest Generation, LLC

--IDR 'CCC';

--Secured term loan 'B/RR1'.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 12, 2011;

--'Distressed Debt Exchange', Aug. 12, 2011;

--'Recovery Ratings and Notching Criteria for Utilities', May 12, 2011;

--'Rating North American Utilities, Power, Gas and Water Companies', May 16, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Distressed Debt Exchange -- Global Cross-Sector Criteria - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649249

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648449

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

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