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Rating Action:

Moody's lowers Dynegy's CFR to Caa3

28 Mar 2011

Approximately $6.0 Billion of debt securities affected

New York, March 28, 2011 -- Moody's Investors Service lowered the ratings of Dynegy Holdings, Inc. (DHI), including its Corporate Family Rating (CFR) and Probability of Default Rating (PDR) to Caa3 from Caa1 along with the ratings of various affiliates. The rating outlook for DHI is negative.

Downgrades:

..Issuer: Dynegy Holdings Inc.

....Corporate Family Rating, Downgraded to Caa3 from Caa1

....Probability of Default Rating, Downgraded to Caa3 from Caa1

....Senior Secured Bank Credit Facility, Downgraded to B2, LGD1, 06% from B1, LGD1, 07%

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3, LGD4, 58% from Caa2, LGD4, 60%

....Multiple Seniority Shelf, Downgraded to (P)Caa3, (P)Ca from (P)Caa2, (P)Caa3

..Issuer: Dynegy Inc.

....Multiple Seniority Shelf, Downgraded to (P)Ca, (P)Ca, (P)Ca from (P)Caa3, (P)Caa3, (P)Caa3

..Issuer: NGC Corporation Capital Trust I

....Preferred Stock Preferred Stock, Downgraded to Ca from Caa3

..Issuer: Roseton-Danskammer 2001

....Senior Secured Pass-Through, Downgraded to Caa3, LGD4, 58% from Caa2, LGD4, 60%

..Issuer: Dynegy Capital Trust II

....Preferred Stock Shelf, Downgraded to (P)Ca from (P)Caa3

..Issuer: Dynegy Capital Trust III

....Preferred Stock Shelf, Downgraded to (P)Ca from (P)Caa3

RATINGS RATIONALE

"The two notch downgrade of DHI's CFR and PDR reflects the change in corporate governance announced earlier this month, which we believe increases default risk for bondholders, coupled with the weak financial prospects that are expected to continue", said A.J. Sabatelle, Senior Vice President of Moody's.

The downgrade partly reflects the uncertainty around Dynegy Inc.'s (DYN) corporate governance, including the appointment of four new board members, the departure of the company's CEO and CFO, and the fact that DYN's existing board plans to not stand for reelection at the shareholder's meeting in June. Of the four board members that will comprise DYN's future board, two represent the interests of Icahn Enterprises (Icahn), which now has the option to own up to 19.9% of DYN's common stock, while a third represents Seneca Capital, another large shareholder. While information remains limited about the long-term intentions of the board, we believe that default risk, through some form of distressed debt exchange, has increased with this change in corporate governance. The downgrade also considers our expectations for the company's financial metrics over the next several years which remain weak, given the expected margins for electric prices and the need for the company to complete certain environmental capital investments.

As discussed in previous research published by Moody's, the most pressing near-term concern is the potential covenant default in the company's credit facilities caused by the combination of a higher interest coverage covenant threshold and an expected decline in cash flow (EBITDA). A failure to address this issue could lead to the termination of about 75% of the company's current liquidity which is critical given the prospects for negative free cash flow over the next few years. Today's rating action incorporates our expectation that DHI will be able rectify the potential covenant violation in some way with its banks which may eventually lead to more moderately sized replacement borrowing arrangements for use during this down cycle. Our view is based on the substantial collateral coverage that exists at DHI which should help to facilitate an amendment or a replacement of this facility. We also believe that Icahn and Seneca, as board members and as the largest shareholders, have an economic vested interest in not having DYN file for bankruptcy particularly since large refinancing risk does not occur until June 2015. Given this four year timeframe for the market dynamics to change, we believe that a core element of the new board's strategy to enhance shareholder value may include the purchase of a substantial amount of DHI debt at a discount in order to de-lever the company in the hope that market economics will improve by 2015.

From a recovery perspective, Moody's expects DHI to provide similar recovery prospects as other global corporate enterprises. While DYN's assets have a long life and cannot be easily replicated, DYN operates a capital intensive commodity business and like other commodity businesses, many of the factors that influence valuation and overall credit quality remain outside of the control of management, which in the case of unregulated power, includes weather and the price of natural gas. Moreover, DHI's operations are heavily dependent upon the performance of its Midwest operations, where margins continue to be weaker than other areas of the US due to a more tepid economic recovery and the preponderance of nuclear generation in that part of the country. Based upon our Loss Given Default (LGD) methodology and our view of average recovery prospects across the company, we believe that company's CFR and PDR should remain the same at Caa3.

DHI's speculative liquidity rating of SGL-4 reflecs our concern about DHI's internal sources of liquidity over the next four quarters given the continued generation of negative free cash flow as the company completes the required environmental capital spend on its Midwestern generation fleet. The SGL-4 factors in the impact of a potential covenant breach in the company's credit facilities which could result in the loss of a substantial portion of the company's liquidity and a possible bankruptcy filing. We observe that DHI has been able to raise liquidity in the past from a variety of asset sales and note the $1.36 billion value that NRG Energy, Inc. placed on DYN's California and Maine assets as a data point that supports the company's ability to raise alternate liquidity, if necessary. Moody's further believes that DYN's California assets may be worth more today following the tragic earthquake in Japan given the importance of the Diablo Canyon nuclear plant to the power needs of the state and the scrutiny that has begun and will likely continue on that plant as it pursues its relicensing efforts.

Moody's continues to view DHI as being a financially distressed company, given its highly levered capital structure relative to its ability to generate sustainable cash flow. The company's cash flow generation is highly exposed to natural gas and power commodity prices, which are expected to remain low over the next several years. The continuing negative rating outlook also factors in our concern about the ultimate direction of the company following the change in corporate governance, along with the potential for a covenant violation in the company's credit facilities.

Prospectively, ratings are unlikely to be upgraded over the intermediate term horizon, largely due to our expectations of negative free cash flow for the next several years. Should DHI address its near-term liquidity concerns, the rating and outlook could stabilize. Longer-term, should natural gas and power commodity prices and market heat rates improve materially, for a sustained period of time, DHI's rating and rating outlook could eventually, be upgraded.

The principal methodologies used in this rating were Global Unregulated Utilities and Power Companies published in August 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Headquartered in Houston, Texas, DHI is an independent power producer that owns a portfolio of more than 11,800 MW electric generating assets. DHI is wholly-owned by Dynegy, Inc.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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 lowers Dynegy's CFR to Caa3
No Related Data.
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