Markets & Finance

After Debt Sale, Dynegy Ratings Outlook Still Negative


On Feb. 20, Standard & Poor's today its BBB+ rating to Dynegy Holdings Inc.'s $500 million senior unsecured notes due 2012. The notes rank equally with all of Dynegy's other unsecured senior obligations. Proceeds from the sale will be used to repay some outstanding debt under Dynegy's $1.2 billion 364-day revolving credit facility and general corporate uses. The corporate credit rating remains on CreditWatch with negative implications.

"The CreditWatch listing reflects uncertainty surrounding the pending lawsuit filed by Enron Corp. that alleges that Dynegy falsely executed its right to terminate the merger agreement," says Standard & Poor's credit analyst John Kennedy. Standard & Poor's cannot at this time determine the suit's outcome. Also, in light of certain events related to the energy trading and marketing industry, Standard & Poor's is examining general counterparty confidence and liquidity issues. A lack of counterparty confidence could result in lower trading volumes, which could affect a firm's financial performance. In addition, a lack of confidence could spur liquidity issues as counterparties demand increases in collateral to maintain trading relationships. Liquidity positions can also become stressed due to ratings triggers embedded within securities and trading contracts.

Dynegy is attempting to firm up its balance sheet to address these matters, as evidenced by its restructuring plan. The plan called for $500 million in equity issuances and another $750 million in asset sales and capital expenditure reductions in 2002. Notably, the company has begun executing the plan by raising about $500 million in common equity through a stock sale on Dec. 20, 2001. Furthermore, ChevronTexaco Corp. exercised its right to purchase an additional 10.4 million shares of Dynegy Inc. The transaction, worth about $200 million, should help Dynegy's capital structure and liquidity needs. The purchase stems from ChevronTexaco's right to participate in Dynegy's Dec. 20, 2001 stock sale. Standard & Poor's continues to evaluate the merits of the plan and Dynegy's overall credit protection measures to ensure that the firm's risk appetite, absolute debt levels, and cash flow generation from each of its business lines are commensurate with its current ratings.

The risk of a downgrade by another rating agency is not factored into the ratings, as it would require Standard & Poor's to have an opinion on the criteria of another agency and the specific application of the criteria of that rating agency. Standard & Poor's has often observed that rating triggers limit a company's flexibility and can amplify the seriousness of credit quality deterioration and contribute to a ratings cliff.

The ratings for Dynegy and its subsidiaries remain on CreditWatch negative, reflecting uncertainty surrounding the pending lawsuit filed by Enron that alleges that Dynegy falsely executed its right to terminate the merger agreement. Standard & Poor's cannot at this time determine the suit's outcome. Also, in light of certain events related to the energy trading and marketing industry, Standard & Poor's is examining general counterparty confidence and liquidity issues.


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