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07 Mar 2007
Moody's assigns Ba1 rating to Dynegy's new credit facilities
New York, March 07, 2007 -- Moody's Investors Service assigned a Ba1 rating to Dynegy Holdings
Inc.'s (DHI) new $1.25 billion senior secured
credit facilities, including a $750 million revolver and
a $500 million synthetic letter of credit facility. In conjunction
with the announcement of the current transaction, Moody's
downgraded the rating on Dynegy's existing Second Priority Notes
to Ba2 from Ba1. Moody's affirmed Dynegy's other ratings,
including its B1 Corporate Family Rating (CFR). The outlook remains
A $275 million draw on the revolver will be used to help finance
Dynegy's pending merger with several affiliates of the LS Power
Group. The balance of the revolver commitment will be available
to support the company's working capital needs. The synthetic
letter of credit facility will be used to issue letters of credit to support
the obligations of both Dynegy and the LS Power entities with which it
is merging. The credit facilities are secured by first priority
perfected security interests in and liens upon substantially all the assets
of Dynegy, its parent guarantors and its subsidiaries, excluding
Sithe/Independence Power Partners, LP and the LS Power entities
with which Dynegy is merging.
In addition to the proceeds of the draw on the revolver, DHI's
parent, Dynegy Inc. (DYN), will exchange 340 million
shares of Class B stock (equal to about 40% of total equity),
valued at approximately $2 billion as of September 15, and
$100 million in cash for 100% of the LS Power Group's equity
interest in LSP Gen Finance, LSP Kendall, LSP Ontelaunee,
LSP Griffith, and Plum Point Power Associates, and a 50%
interest in a generation development joint-venture. The
$2.3 billion in gross funded project debt at the LSP affiliates
will remain in place, but will be non-recourse to both DHI
Moody's previously affirmed Dynegy's ratings following the
initial announcement of the merger plans. However, the company
now intends to use its own letter of credit facility to support the LS
Power entities' obligations in lieu of a stand-alone letter
of credit facility as previously proposed. In addition, it
plans to immediately refinance the Dynegy, Inc. (DYN) junior
subordinated debentures that are to be issued to the LS Power Group at
financial close with a draw on its revolving credit facility. As
a result, DHI will have more direct exposure to the LS Power entities
than was originally contemplated. This is offset somewhat by the
plan to integrate the LS Power entities as subsidiaries of DHI rather
than DYN. Moody's does not believe that in and of themselves
the revisions to the transaction structure have a significant impact on
the credit of any of the affected entities. The downgrade of the
second lien secured notes reflects their expected increased subordination
resulting from the proposed draw on the first lien revolving credit facility.
Though the loss given default assessment of the notes remains stable at
LGD 2, the increase in the LGD rate to 21% from 19%
is sufficient to drive the rating of the second lien notes downward from
Ba1 to Ba2.
The merger will increase the size of Dynegy's portfolio of generating
assets by roughly two-thirds, to approximately 20,000
MW, while improving Dynegy's geographic, fuel and dispatch
diversity. In addition, Dynegy will have the opportunity
to participate in LS Power's development pipeline, which includes
another 10,000 MWs of greenfield and re-powering projects.
The transaction is expected to increase Dynegy's operating cash flow while
LS Power's existing hedges and power sales agreements provide a greater
degree of stability to the company's revenues, which are currently
largely unhedged and vulnerable to commodity price volatility.
Nevertheless, the LS Power projects are highly leveraged and Moody's
does not anticipate a substantial improvement in Dynegy's consolidated
financial ratios as a direct result of the proposed merger. Moreover,
we note that much of the free cash flow generated by the LS Power projects
will be trapped by cash sweep mechanisms requiring the prepayment of the
With 2006 generating segment run-rate earnings growth of $75
million equal to just 50% of previously forecast levels,
Moody's calculates that on a pro forma basis the company's
adjusted FFO/Debt and FFO/Interest were approximately 7.6%
and 2.1x, respectively, for the year. Coupled
with the expectation that the company's financial metrics are not
likely to improve substantially as a direct result of the merger in the
near term, these figures are somewhat narrow for a B1 CFR for a
company with Dynegy's business risk profile. However,
a number of other developments are anticipated to result in more immediate
improvements to financial performance. Management disclosed that
based solely on the projected net financial impact of the last year's
wholesale power auction in Illinois, where Dynegy's largest coal-fired
baseload assets are located, the company could realize a potential
increase of approximately $100 million in operating margin for
2007 as compared to 2006. The auction replaced a portion of a below-market
contract with Ameren that expired at the end of last year with a multi-year
commitment to provide up to 1,400 MWs of capacity on a load-following
basis at the around the clock price of $65/MWh. The company
will also have the opportunity to realize substantial upside through the
sale into the market of additional capacity that was previously contracted
to Ameren at below-market rates. Up to another $50
million could be generated through the restructuring of the power and
steam sales agreements for CoGen Lyondell, which took effect at
the beginning of 2007. Finally, management anticipates various
opportunities to optimize its existing asset portfolio that should also
result in significant earnings increases.
According to the company's forecast, Moody's calculates that
the combined impact of the merger, the auction, and other
on-going improvements should result in adjusted funds from operation
(FFO) to debt and FFO to interest ratios in excess of 10% and 2.5x,
respectively, by the end of 2007, which would be more consistent
with the existing B1 Corporate Family Rating. Moody's notes
that there is considerable uncertainty regarding the company's ability
to realize some of these improvements since the company remains vulnerable
to potential volatility in gas prices, the impact of the proposed
merger notwithstanding. If the company's financial performance
continues to fall materially below forecasted levels over the next three
to six months, downward pressure on its ratings and/or outlook could
Dynegy is an independent power producer headquartered in Houston,
TX, with an approximately 12,000 MW portfolio of assets.
The following ratings were affected by this action:
Dynegy Holdings, Inc.
- senior secured revolving credit facility at Ba1 (LGD1,
- senior secured letter of credit facility at Ba1 (LGD1,
Dynegy Holdings, Inc. - 9.875% second
priority senior secured notes due 7/15/2010 to Ba2 (LGD2, 21%)
from Ba1 (LGD2, 19%)
Ratings affirmed/assessments revised:
Dynegy Holdings, Inc.
- senior unsecured notes at B2 (LGD4, 63% from LGD4,
- multiple seniority shelf (senior unsecured) at (P)B2 (LGD4,
63% from LGD4, 61%)
Dynegy Danskammer, LLC and Dynegy Roseton, LLC, pass-through
trust certificates at Ba3 (LGD3, 36% from LGD3, 35%)
Dynegy Holdings, Inc.
- corporate family rating at B1
- multiple senior shelf (subordinate) at (P) B3 (LGD6, 96%)
NGC Corporation Capital Trust I, subordinated capital income securities
(SKIS) due 6/1/2027 at B3 (LGD6, 96%)
Dynegy Capital Trust II, trust preferred stock shelf at (P)B3 (LGD6,
Dynegy Capital Trust III, trust preferred stock shelf at (P)B3 (LGD6,
Dynegy Inc., multiple seniority shelf at (P)B3 (LGD6,
William L. Hess
Corporate Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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