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Rating Action:

MOODY'S ASSIGNS Ba3 TO SENIOR SECURED TERM LOAN OF DYNEGY HOLDINGS INC.

22 May 2006
MOODY'S ASSIGNS Ba3 TO SENIOR SECURED TERM LOAN OF DYNEGY HOLDINGS INC.

Approximately $3.75 Billion of Debt Securities Affected

New York, May 22, 2006 -- Moody's Investors Service assigned a Ba3 rating to Dynegy Holdings Inc.'s (DHI) proposed $150 million senior secured term loan facility. In addition, Moody's has affirmed the ratings on the $3.6 billon of outstanding recourse debt of DHI, including its $470 million revolving and $200 million synthetic letter of credit facilities, which are currently undrawn. The rating outlook is stable.

The term loan will be secured pari passu with DHI's existing credit facilities under its Fourth Amended and Restated Credit Agreement. The facilities are secured by a first priority lien on substantially all of the company's assets, including the stock in its subsidiaries. The facility also benefits from a guarantee from parent company, Dynegy Inc. (DYN) and from the majority of its subsidiaries.

Upon receipt of the term loan proceeds, DHI will dividend $50 million to DYN, which will use these funds together with cash on hand and the proceeds of a planned equity issuance expected to total approximately $150 million to redeem its $400 million of Series C preferred stock (unrated). The equity issuance and term loan are scheduled to close simultaneously and each is conditional upon the other. Dynegy plans to sell its 830 MW Rockingham peaking facility to Duke Power for $195 million and to use a portion of the proceeds to repay the term loan, which will mature five days after the sale closes. While DYN's consolidated unrestricted cash will drop by approximately $60 million as a result of these transactions, cash at DHI, which is subject to dividend restrictions, will increase by $145 million. Moody's does not believe the sale of the Rockingham facility will have a significant negative impact on cash flows over the next two to three years.

Dynegy Holdings' B1 corporate family rating (CFR) is similar to the ratings assigned to other independent power producers Mirant (CFR B1) and Reliant (CFR B2 on review for possible downgrade). In addition to the company's power generation business concentration risk, the rating is constrained both by leverage that remains high relative to earnings and a commodity-cyclical business strategy of not hedging, leaving Dynegy exposed to a drop in gas prices. While Dynegy's pro forma financial metrics (based on its 2005 operating performance) are low for a B1 rated company with Dynegy's fundamental risk profile, the CFR is supported by the company's diversified electrical generation asset base, which should benefit from an expected recovery in the power market, and the flexibility offered by the company's debt structure that has no near-term maturities.

Moody's notes that Dynegy reported a material weakness in its 10-Q for the first quarter of 2006 relating to risk management assets and liabilities in addition to one relating to income taxes in both its 2005 and 2004 10-Ks. While Moody's believes that such material weaknesses generally relate to isolated problems, the fact that these control issues were not remediated is considered a credit negative. Moody's will continue to monitor Dynegy's progress in remediating these material weaknesses.

The rating and stable outlook reflect Moody's expectation of DHI's continued operating performance improvement as the power markets recover. DHI's ratings could improve through a combination of improving operational performance, consistent positive free cash flow, and cash flow coverage (FFO/Adjusted Debt) above 10%. The ratings could experience negative pressure as a result of further deterioration in operating or financial performance relative to plan, a leveraging acquisition, or further reduction in liquidity. Moody's notes that with its business concentrated in a market characterized by unpredictable fluctuations in commodity prices, DHI's ratings could be subject to increased ratings volatility.

Following an extensive restructuring of its business, Dynegy is now focused on merchant generation. Headquartered in Houston, TX, the company's 12,769 MW portfolio of assets is diversified by geographic region as well as dispatch type and fuel source.

Ratings affirmed include:

Dynegy Holdings Inc. --

Corporate Family Rating, B1

Senior Secured Revolving Credit Facility, rated Ba3, $475 million

Senior Secured Synthetic Letter of Credit Facility, rated Ba3, $200 million

Second Priority Senior Secured Notes, rated B1, $86 million outstanding

Senior Notes, rated B2 (unsecured), $2.9 billon outstanding

Shelf (Senior Unsecured/Subordinated/Preferred), rated (P)B2/(P)B3/(P)Caa1 respectively

Dynegy Inc. --

Shelf (Senior Unsecured/Subordinated/Preferred), rated (P)Caa1/(P)Caa2/(P)Caa3

Dynegy Roseton, L.L.C. and Dynegy Danskammer, L.L.C. -- Pass-Through Certificates, rated B2 (senior unsecured guarantee of DHI), $800 million outstanding

Dynegy Capital Trust II -- Shelf rated (P)B3

Dynegy Capital Trust III -- Shelf rated (P)Caa1

NGC Corporation Capital Trust I -- Trust Securities, rated B3 (DHI subordinated debentures), $200 million outstanding

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Aaron Freedman
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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