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Announcement:

Moody's: No rating change expected at Dynegy from Icahn's offer

Global Credit Research - 16 Dec 2010

New York, December 16, 2010 -- Moody's Investors Service believes that the ratings and negative rating outlook for Dynegy, Inc. (Dynegy) and its subsidiary, Dynegy Holdings, Inc (DHI: Caa1 Corporate Family Rating) will remain unchanged at this time following yesterday's announcement that its board had agreed to be acquired by Icahn Enterprises LP (IEP) for $5.50 per share in cash, or approximately $665 million.

"The current Caa1 Corporate Family Rating captures many of the fundamental risks facing Dynegy, " said A.J. Sabatelle, Senior Vice President at Moody's. "While weak operating cash flow, high debt levels, and negative free cash flow are expected to persist over the intermediate term, the planned acquisition by IEP adds incremental uncertainty to an already challenged credit story", adds Sabatelle.

During 2011 and 2012, Dynegy is expected to generate both negative operating cash flow and negative free cash flow due to weak operating margins, higher required lease payments, and nondiscretionary capital expenditure requirements. In addition, we remain concerned about Dynegy's liquidity (DHI's speculative grade liquidity rating is SGL-4), given the negative free cash flow profile over the next two years, the resulting importance for DHI to maintain access to a credit facility and the increased likelihood of a covenant violation under the existing bank credit facility sometime during the next three quarters.

Moody's believes that the proposed transaction with IEP constitutes a change of control under the company's secured credit facilities requiring both the repayment of the funded obligations and the termination of the credit facilities. Based on Dynegy's most recent financial statements, we calculate funded debt under the credit facilities as of November 1st at approximately $552 million. Based on the merger agreement terms, prior to transaction close, Dynegy will use its reasonable efforts (at IEP's expense) to assist IEP in a refinancing of all or any portion of any required debt financing. The merger agreement also indicates that upon closing, IEP will make available not more than $1 billion of credit facilities for Dynegy and its subsidiaries to meet operating funding requirements or to repay any outstanding indebtedness from the change of control. At November 1, 2010, Dynegy's cash on hand and short-term investments were approximately $650 million.

Assuming the acquisition is completed, we believe that the terms and conditions of any replacement credit facility will allow Dynegy to operate its business without risk of interruption during this weak commodity cycle. We also believe that any new credit facility may give Dynegy an option to use balance sheet cash or the proceeds of new junior lien debt to repurchase portions of the company's 2015 and beyond debt maturities (approximates $3.5 billion) at a discount, in an effort to de-lever the balance sheet. To the extent that these events unfold, Moody's will access the terms and conditions around any potential debt repurchase strategy along with the amount of debt that is actually repurchased. Depending on the circumstances and the magnitude of the final outcome surrounding this strategy, it is possible that such transactions, should they occur, could be considered a distressed exchange. Moody's believes that a merger with either IEP or another private equity firm, including the prior suitor, The Blackstone Group L.P. (Blackstone), increases the likelihood of this type of strategy being pursued.

Yesterday's announcement follows a November 2010 decision by Dynegy's board to explore strategic alternatives following the unsuccessful acquisition of the company by Blackstone that included the sale of 3,884 megawatts (MW) of Dynegy's California and Maine assets to NRG Energy, Inc. Under the terms of this merger agreement, a wholly owned subsidiary of IEP is expected to commence a tender offer for all of the outstanding Dynegy shares not already owned no later than December 22, 2010. We understand IEP and its affiliates own about 9.9% of Dynegy's outstanding shares and have previously acquired options to purchase about 5% of additional shares. Also, under the terms of the merger agreement, Dynegy will continue pursuing strategic alternatives, during which Dynegy will solicit proposals until January 24, 2011. To the extent that a "superior" all-cash offer is made and supported by Dynegy, and IEP does not wish to top the "superior" offer, IEP has agreed that it will support the offer.

Completion of the transaction is conditioned on, among other things, regulatory approvals and satisfaction that at the close of the tender offer, IEP and its affiliates own at least 50% of Dynegy's shares (minimum condition). Following receipt of the minimum condition, a merger will be effected such that an IEP subsidiary will be merged into Dynegy. In the event that the minimum condition is not met, the parties have agreed to complete the transaction through a one-step merger after receipt of stockholder approval. Assuming no superior proposal is received during the strategic alternatives process and the tender offer is successfully completed, Dynegy expects to close the transaction in the first quarter of 2011.

Moody's will monitor on-ongoing developments relating to this transaction as well as the company's strategic alternatives process. As greater clarity emerges concerning the likelihood of this transaction moving forward and as we gain greater insight into the direction of Dynegy, appropriate rating actions, if necessary, will be disseminated.

The last rating action occurred on October 1, 2010, when the ratings were downgraded to their current rating levels, with a negative outlook.

The principal methodology used in rating Dynegy and DHI was Rating Methodology: Unregulated Utilities and Power Companies, published in August 2009 and available on www.moodys.com in the in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Houston, Texas, Dynegy wholly-owns DHI, an independent power producer that owns a portfolio of 12,100 MW of electric generating assets.

New York
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: No rating change expected at Dynegy from Icahn's offer
No Related Data.
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