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Rating Action:

Moody's affirms Dynegy's B2 CFR; assigns Ba3 rating to $2 billion secured term loan; outlook is stable

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.

Assignments:

....Senior Secured Bank Credit Facility, Assigned Ba3, LGD 2

Outlook Actions:

....Outlook, Remains Stable

Affirmations:

.... Probability of Default Rating, Affirmed B2-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

.... Corporate Family Rating, Affirmed B2

....Senior Secured Bank Credit Facility, Affirmed Ba3, LGD2

....Senior Unsecured Regular Bond/Debenture, Affirmed B3, LGD lowered to LGD5 from LGD4

RATINGS RATIONALE

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.

Liquidity

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.

Outlook:

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 until 2018.

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.

REGULATORY DISCLOSURES

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 respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com 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
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's affirms Dynegy's B2 CFR; assigns Ba3 rating to $2 billion secured term loan; outlook is stable
No Related Data.
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