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Global Credit Research - 15 Jun 2016
New York, June 15, 2016 -- Moody's Investors Service, ("Moody's") today
assigned a Ba3 rating and LGD2 (23%) loss given default rating
to Dynegy Inc's (Dynegy) proposed $2 billion senior secured
term loan. The B2 corporate family rating (CFR), Ba3 senior
secured bank credit facility rating, B3 senior unsecured rating
and SGL-2 speculative grade liquidity (SGL) rating are all affirmed.
The outlook is stable. The LGD4 (66%) loss given default
rating on the unsecured bonds was lowered to LGD5 (73%) due to
the addition of a substantial amount of secured debt to the capital structure.
The proceeds from the new secured term loan, along with a $400
million Tangible Equity Unit (TEU) issuance, a $150 million
equity investment in Dynegy by the private equity firm Energy Capital
Partners (ECP), $450 million in revolver draws and about
$340 million in cash will be used to purchase an 9.1 GW
portfolio of gas and coal fired assets from GDF-Suez Energy North
America Inc, an unrated subsidiary of Engie S.A. (Engie,
A2 stable) for $3.3 billion.
....Senior Secured Bank Credit Facility,
Assigned Ba3, LGD 2
....Outlook, Remains Stable
.... Probability of Default Rating,
.... Speculative Grade Liquidity Rating,
.... Corporate Family Rating, Affirmed
....Senior Secured Bank Credit Facility,
Affirmed Ba3, LGD2
....Senior Unsecured Regular Bond/Debenture,
Affirmed B3, LGD lowered to LGD5 from LGD4
The affirmation of Dynegy's B2 CFR rating reflects the company's
substantial merchant exposure, recent acquisitions that have strengthened
its business risk profile, and a financial profile that is adequate
for the rating. "The new financing plan is consistent with
Moody's expectation that Dynegy will eventually acquire full ownership
of the Engie assets, while the Ba3 senior secured rating reflects
the presence of over $5 billion of unsecured debt in the capital
structure" said Swami Venkataraman, Vice President --
Senior Credit Officer at Moody's. "While the acquisition
further strengthens Dynegy's market position and we expect that
about 75% of EBITDA will now come from the gas plants in the portfolio,
we do not anticipate material deleveraging until 2018 with Moody's
adjusted cash from operations pre-working capital (CFO Pre-WC)
coverage of debt remaining at 4%-6%, free cash
flow of about $100-200 million and Debt/EBITDA of about
8x in 2016-17 including revolver draws", he added.
The acquisition was first announced in February 2016, when Dynegy
intended to complete the acquisition at a joint venture with ECP.
That structure was largely a result of the then prevailing unfavorable
capital market conditions. The JV had put and call options that
envisaged Dynegy eventually acquiring full ownership of the assets.
Dynegy and ECP have now terminated the JV agreement. The termination
requires Dynegy to make a $375 million payment to ECP, which
we assume will be initially financed from Dynegy's revolver.
Dynegy is pursuing asset sales and the proceeds proceeds are expected
to be utilized to retire revolver drawings and to pay the ECP make whole
payment. Moody's forecast however does not factor in a sale
of the Independence plant.
The acquisition increases the size of Dynegy's portfolio to about
30 GW (excluding Illinois Power Holdings) providing more synergies and
economies of scale in operations. Further, 92% of
the Engie portfolio consists of gas-fired combined cycle and peaking
units, and 8% coal plants, primarily the 635 MW Coleto
Creek coal plant in Texas. This is credit positive as gas plants
are much better positioned under current merchant market conditions.
We estimate that about 85% of Dynegy's EBITDA and over 90%
of its free cash flow will come from the gas plants, which provides
greater resiliency to cash flows should market conditions weaken further.
Some cash flow stability is also provided by the fact that about 40%
of Dynegy's gross margin comes from capacity revenues and is hence
known for three years looking forward.
Geographically, PJM and ISO-NE will now dominate the Dynegy
portfolio, providing 60% and 30% of EBITDA.
ERCOT, MISO and CAISO will account for approximately 15%,
8% and 8% respectively of capacity but contribute very little
to EBITDA. In our view, these positions, especially
in MISO and ERCOT, look more like a long call option on a market
recovery. We expect Dynegy to eventually sell its assets in CAISO.
The addition of the Engie assets will generate significant operational
synergies, chiefly in G&A savings, which we have incorporated
into our forecast. There are also expected to be synergies in O&M
costs and capex spending, largely on account of economies of scale
created by Dynegy's 35 GW fleet, which we have not incorporated.
Our forecast also does not consider potential scarcity premium revenues
in Texas while capacity revenues in MISO are held to be constant at the
level of the latest auction ($72/MW-day)
In 2016-17, we expect cash from operations pre-working
capital (CFO Pre-WC) and free cash flow coverage of debt to be
in the range of 4%-6% and 1-2% respectively.
Ratios are lower in 2016 owing to the acquisition debt with the benefit
of only 2-3 months of cash flows while in 2017, the fleet
has higher, non-recurring, maintenance capex that depresses
free cash flow. We expect the financial profile to improve from
2018 onwards because of stronger cash flows, resulting primarily
from higher capacity revenues in New England and more moderate levels
of maintenance capex. We expect cash from operations pre-working
capital (CFO Pre-WC) and free cash flow coverage of debt of 7%-9%
and 5-6% respectively, while Debt/EBITDA declines
to about 6x-7x. These higher ratios would be consistent
with a higher rating. Dynegy has also indicated a desire to use
excess cash flows to deleverage the balance sheet, which would improve
ratios further. Nevertheless, we do not expect the higher
ratios, or any material deleveraging, until 2018.
Dynegy has an SGL-2 speculative grade liquidity rating.
This assessment primarily reflects our expectation that the company can
fund all operating cash needs, including maintenance capex,
from operating cash flows for the next twelve months. Dynegy has
a $1.48 billion credit facility,. As part of
this acquisition, Dynegy is increasing its revolver by $75
million and putiing in place an additional $50 million LC facility.
$441 million of LCs were outstanding at March 31, 2016.
However, another $450 million will be drawn to fund the Engie
acquisition and potentially an additional $375 million to cover
the ECP make whole payment. While this would utilize about 78%
of the revolver, we expect these draws to be paid down from asset
sale proceeds. Failure to do so in a timely manner could negatively
affect Dynegy's SGL-2 speculative grade liquidity rating.
Dynegy's revolver has a covenant requiring consolidated senior secured
net debt to consolidated adjusted EBITDA to be no more than 3.75x
for 2016 and 3.00x after March 31, 2017. This covenant
does not apply if utilization under the facility is less than 25%.
Also, Dynegy is allowed to decrease its secured debt by up to $150
million of cash on hand for ratio purposes. Dynegy was comfortably
in compliance with this covenant as of March 31, 2016. The
addition of $2 billion in secured debt would lower the cushion,
but we expect the ratio to still remain at about 2.00x after the
close of the acquisition.
The stable outlook reflects our expectation that weak commodity markets
will continue to be manageable for the company given it's well diversified
portfolio, large share of gas-fired generation, and
significant share of capacity revenues. It also considers our expectation
that Dynegy will maintain CFO pre-WC coverage of debt in the 4-6%
range and that any further opportunistic acquisitions will be financed
prudently without materially impacting credit metrics.
WHAT COULD CHANGE THE RATING - UP
Dynegy's ratings could be upgraded if CFO pre-WC and FCF coverage
of debt rises to 7-9% and 5-6% respectively,
along with the expectation that these financial metrics can be sustained.
Based on current market prices, this could happen as soon as 2018,
although this is by no means assured. The use of free cash flow
to decrease leverage as opposed to share buybacks or further acquisitions
would also be credit positive, but is also unlikely to be material
WHAT COULD CHANGE THE RATING - DOWN
Dynegy is currently well positioned at its current rating. However,
downside risk may arise if CFO pre-WC coverage of debt falls below
4% on a sustained basis. This could be caused by a further
weakening of commodity prices or spark spreads, or by additional
debt funded acquisitions. Separately, Dynegy's unsecured
ratings may also be negatively affected if the company was to issue a
significant amount of additional secured debt in the future that materially
alters recovery expectations for the unsecured notes.
The principal methodology used in these ratings was Unregulated Utilities
and Unregulated Power Companies published in October 2014. Please
see the Ratings Methodologies page on www.moodys.com for
a copy of this methodology.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
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For any affected securities or rated entities receiving direct credit
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Please see www.moodys.com for any updates on changes to
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for additional regulatory disclosures for each credit rating.
Swami Venkataraman, CFA
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's affirms Dynegy's B2 CFR; assigns Ba3 rating to $2 billion secured term loan; outlook is stable
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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