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
