UPDATE 2-Court won't block Dynegy restructuring

Fri Jul 29, 2011 5:41pm EDT

* Judge refuses to issue temporary restraining order

* Finds no imminent irreparable harm if deal closes

* Clears the way for Dynegy to reorganize and refinance (Adds details from ruling from paragraph four, byline and bullet points)

By Tom Hals

WILMINGTON, Del., July 29 (Reuters) - Dynegy Inc (DYN.N) can proceed with its debt restructuring after a Delaware judge on Friday declined to grant a temporary restraining order to stop the company's overhaul.

The ruling clears the way for the $1.7 billion debt refinancing that Dynegy, the third-largest U.S. independent power producer, was preparing to close this week.

Public Service Enterprise Group (PEG.N) opposed the reorganization because it feared it would not be able to enforce financing guarantees after Dynegy splits off gas and coal assets into new entities.

Delaware Chancery Court Judge Donald Parsons said PSEG failed to show that there was the existence of imminent irreparable harm if the deal was allowed to close.

PSEG did not immediately reply to a request for comment.

Dynegy has been trying to refinance its debt load after two failed takeover offers -- including one from Carl Icahn earlier this spring. The company warned in March that it might have to file for bankruptcy as it dealt with nearly $5 billion in debt.

Dynegy proposed splitting off two entities, one holding its coal assets and one for its natural gas units, with separate financing for each.

PSEG fears the overhaul will allow Dynegy to default on two power plants, Roseton OL LLC and Danskammer OL LLC, that it bought from Dynegy for $920 million and leased back in 2001 under long-term agreements.

About $790 million remains outstanding on the leases, according to court documents.

The two units do not generate enough cash to meet the lease payments, and as a result Dynegy must take money from other Dynegy operations.

However, those other operations are being transferred to the newly created "bankruptcy-remote" entities. PSEG said in court papers that in the "likely event" of a default on the Roseton and Danskammer leases, PSEG's right to enforce its guaranty would have little value.

Parsons found in his 58-page opinion that the same value remains within Dynegy's corporate family and that the deal would bolster Dynegy's financial standing, a benefit to PSEG by allowing continued payment on the lease obligations.

Dynegy has also been sued in New York state court over its planned restructuring. Creditors in that case argue the overhaul puts assets beyond their reach and increases the risk the company will default. [ID:nN1E76K2CV]

The New York case was on hold until the Delaware case was resolved.

The cases are LibertyView Credit Opportunities Fund LP et al v. Dynegy Holdings Inc, New York State Supreme Court, New York County, No. 651998/2011, and Roseton OL LLC and Danskammer OL LLC v Dynegy Holdings Inc, Delaware Chancery Court, No. 6689. (Reporting by Tom Hals. Editing by Robert MacMillan, Bernard Orr)

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