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Global Credit Research - 13 Aug 2010
Approximately $6.0 Billion of Debt Securities Affected
New York, August 13, 2010 -- Moody's Investors Service affirmed the ratings of Dynegy Holdings Inc.
(DHI), including its Corporate Family Rating (CFR) at B3 and its
speculative grade liquidity rating at SGL-4. The company's
rating outlook remains negative.
The rating affirmation follows today's announcement that Dynegy
Inc. had entered into a definitive merger agreement pursuant to
which it will be acquired by an affiliate of The Blackstone Group L.P.
(Blackstone) in a transaction valued at approximately $4.7
billion, including the assumption of existing debt. Simultaneous
with the merger closing, NRG Energy, Inc. (NRG) has
agreed to purchase 3,884 megawatts (MW) of Dynegy's assets
in California and Maine for $1.36 billion.
While completion of these two transactions could help to stabilize and
improve DHI and Dynegy's credit profile over time, the B3
CFR rating affirmation reflects the continued expectation for weak financial
performance in 2010 and 2011 due principally to reduced power margins.
Over the next two years, we calculate that the company's cash flow
(CFO pre-WC) to debt will be less than 5%, cash flow
coverage of interest will be around 1.5x, and the company
will generate substantial negative free cash flow due to the size of the
company's capital expenditure program. While we expect DHI to complete
the majority of the critical environmental capital spend by the end of
2011 and stronger cash flow may begin to surface in 2012 as the environmental
capital expenditures are reduced, the projected credit metrics for
2010 and 2011 remain quite weak and consistent with the existing B3 rating.
The continuation of a negative rating outlook for DHI and Dynegy reflects
our concern at this juncture about the execution risks associated with
completing the transaction and the direction of the company under its
new owners should the merger be completed, given the limited information
that exists concerning the transaction and the many challenges facing
the company over the next several years. In addition to the company's
capital spend program, securing an extension of the company's
credit facility which expires in April 2012 remains an important milestone.
While liquidity will be aided by the completion of the $1.36
billion asset sale to NRG and credit quality could stabilize following
the merger, it remains unclear at this juncture how management will
operate the company and utilitze the asset sales proceeds given the many
near-term needs facing DHI including capital investment funding,
liquidity, and debt reduction. In the mean time, credit
metrics will remain depressed, particularly given the heavy reliance
that DHI and Dynegy's cash flows and revenues have on the Midwest region,
an area where wholesale power prices have been particularly negatively
impacted by the recession.
Similarly, the SGL-4 speculative grade liquidity rating remains
unchanged reflecting our concern about DHI's internal sources of liquidity
over the next four quarters given the amount of negative free cash flow
expected to be generated by the company in 2010 and 2011 as it completes
the required environmental capital spend on its Midwestern generation
fleet. During this timeframe, we expect the company to become
more reliant on borrowings under its secured revolving credit facility
to fund negative free cash. We understand that based upon the secured
debt to adjusted EBITDA ratio in the DHI revolver, availability
under the revolver may decline over the next twelve months. Additionally,
the company's ability to remain compliant with the EBITDA to interest
covenant in the DHI revolver is likely to become more challenging given
that the covenant test gradually increases over time during the next twelve
to fifteen months. While we believe the company should be able
to satisfy this covenant in the near-term, compliance with
this covenant may become problematic due to the combination of lower EBITDA
and tighter defined covenant limitations in the documents. That
said, should the merger with Blackstone and the subsequent asset
sale to NRG be completed, a change in the SGL rating and the rating
outlook may be warranted, depending upon the manner in which the
asset sales proceeds are deployed.
Under the terms of the merger agreement, Dynegy stockholders will
receive $4.50 in cash for each outstanding share of Dynegy
common stock they own. Under the merger agreement, Dynegy
is permitted to solicit alternative proposals from third parties for a
period of 40 days after the date of the merger agreement. The transaction
is expected to close by the end of 2010. Completion of the transaction
is subject to customary closing conditions, including approval by
Dynegy stockholders and receipt of regulatory approvals. The transaction
is not subject to any financing conditions, and a fund managed by
Blackstone has committed to contribute all of the equity necessary to
complete the transaction.
The last rating action on DHI occurred on July 1, 2010, when
the ratings were downgraded one notch to their current rating levels,
with a negative outlook.
The principal methodology used in rating 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, DHI is an independent power
producer that owns a portfolio of more than 12,000 MW electric generating
assets. DHI is wholly-owned by Dynegy, Inc.
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms Dynegy's ratings; maintains negative outlook
250 Greenwich Street
New York, NY 10007
No Related Data.
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