Fitch Ratings maintains Dynegy Inc. on Rating Watch Evolving pending the bankruptcy proceedings at its wholly owned subsidiary, Dynegy Holdings LLC (DH). Fitch currently rates Dynegy Inc.’s Issuer Default Rating (IDR) ‘CC’.
Fitch has also revised its Rating Watch listing of Dynegy Power, LLC (GasCo, IDR ‘CCC’ by Fitch) and Dynegy Midwest Generation, LLC (CoalCo, IDR ‘CCC’) to Evolving from Negative.
In addition, Fitch has also downgraded DH’s senior unsecured notes to ‘CC/RR3’ from ‘CCC/RR2’ reflecting updated valuation of CoalCo and GasCo and higher than expected DH claims participating in the recovery.
The Rating Watch Evolving at Dynegy reflects the uncertainty around the timing and potential outcome of the ongoing DH’s bankruptcy proceedings. A quick resolution of DH’s bankruptcy proceedings with terms mirroring the settlement agreement entered into with a portion of its creditors on May 1, 2012, could potentially be a credit positive for the company. Conversely, there exists a possibility, albeit considerably diminished in Fitch’s view, that the company could be exposed to a protracted and costly bankruptcy process.
The revision in Rating Watch on GasCo and CoalCo to Evolving from Negative reflects Fitch’s view that it now appears less likely that the reorganization effected in August 2011, which resulted in the creation of Dynegy Coal Holdco, LLC and Dynegy Gas HoldCo, LLC and the subsequent first lien financings, could be unraveled through litigation.
Rating Watch Evolving means ratings could be raised, lowered or maintained. Dynegy’s ultimate capital structure will not be determined until the emergence of DH from bankruptcy, at which point Fitch will conduct a thorough review of Dynegy, CoalCo and GasCo and perform an updated asset valuation and recovery analysis for these entities.
Depending upon the outcome of Fitch’s analysis, the ratings could be raised, lowered or remain the same. Upon the emergence of bankruptcy, Fitch plans to withdraw the IDR and instrument ratings at DH.
As a reminder, 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). The Examiner appointed in the bankruptcy case released its report on March 9, 2012, which concluded that the first phase of restructuring at Dynegy i.e. creation of GasCo and CoalCo in August 2011 was permissible.
However, based on the assumption that DH was insolvent at the time, the Examiner deemed the second phase of restructuring in September 2011, whereby Dynegy transferred CoalCo from DH to Dynegy in exchange for an undertaking, a fraudulent transfer. Based on the same assumption, the Examiner also faulted Dynegy’s board for breach of fiduciary duty. Dynegy has publicly disputed the validity of the Examiner’s assumption of insolvency.
On April 4, 2012, Dynegy reached an agreement with certain DH creditors holding $2.5 billion of claims. Under the agreement, all potential claims arising from the transfer of CoalCo to Dynegy will be settled and the recovery of DH’s creditors will be supported by the value of both CoalCo and GasCo. The agreement also releases all claims and causes of action against the directors, officers and advisors of Dynegy and DH.
Under the agreement, DH’s unsecured creditors will receive common equity representing 99% stake in the reorganized company and $200 million in cash. DH claims participating in this agreement include $3.4 billion of senior unsecured notes, $110 million tax indemnity claim of Public Service Enterprise Group and $540 million guaranty claim of the Central Hudson Lease Notes holders.
In addition, the Lease Notes holders will be entitled to 50% of the proceeds from the sale of the Roseton and Danskammer assets, subject to a total recovery cap of $571 million. The other DH unsecured creditors will be entitled to remaining 50% of the asset sale proceeds. The agreement does not include any holders of subordinated notes.
Fitch has updated its recovery analysis for GasCo and CoalCo and continues to expect superior recoveries on the secured term loan. Fitch values the power generation assets that secure the term loans using a net present value (NPV) analysis. For the NPV, Fitch uses plant values provided by Wood Mackenzie as an input as well as Fitch’s own price deck and other assumptions.
The asset valuation for CoalCo has diminished from Fitch’s prior expectation due to weaker outlook for power prices. For both GasCo and CoalCo, recoveries are in the 91% to 100% ‘RR1’ range. The two-notch separation from the GasCo and CoalCo IDRs are reflective of the possibility of additional first lien debt, which is permissible under these facilities.
The reduced valuation of CoalCo and higher than expected claims against DH has reduced Fitch’s recovery estimate for DH’s unsecured creditors. Fitch’s prior recovery analysis had reflected the liability arising from rejection of Central Hudson lease at $300 million.
Fitch’s updated analysis results in a ‘RR3’ recovery range (51 – 70%) for the senior unsecured notes compared to a prior recovery range of ‘RR2’ (71 – 90%). Fitch has not assumed any proceeds from the sale of Roseton and Danskammer assets, which could provide a potential upside to recovery. Fitch continues to maintain a ‘RR5’ recovery (11 – 30%) for the subordinated capital trust securities that assumes a concession payment from senior creditors.
Fitch has maintained Rating Watch Evolving for the following ratings:
Fitch has affirmed the following ratings:
Dynegy Holdings, LLC
–IDR at ‘D’;
Dynegy Capital Trust I
–Trust preferred at ‘C/RR5’.
Fitch has downgraded the following ratings:
Dynegy Holdings, LLC.
–Senior unsecured notes to ‘CC/RR3’ from ‘CCC/RR2’.
Fitch has revised the Rating Watch to Evolving from Negative for the following ratings:
Dynegy Power, LLC
–Secured term loan ‘B/RR1’.
Dynegy Midwest Generation, LLC
–Secured term loan ‘B/RR1’.