UPDATE 2-Dynegy sued over asset transfer said to help Icahn

Thu Sep 22, 2011 2:25pm EDT

* Bondholders say shortchanged by coal asset transfer

* Restructuring designed to help avoid Dynegy bankruptcy

* Dynegy declines to comment on lawsuit; shares fall (Adds background, details, byline)

By Jonathan Stempel

NEW YORK, Sept 22 (Reuters) - Dynegy Inc (DYN.N) has been sued by bondholders who say a recent restructuring by the third-largest U.S. independent power producer shortchanged them and was intended to help equity investors like Carl Icahn.

The restructuring was designed to help Dynegy avoid bankruptcy, following failed takeover bids by Icahn and private equity firm Blackstone Group LP (BX.N). [ID:nL3E7J81XO]

The restructuring involved the issuance of $1.7 billion of secured debt, and exchanges of some of the roughly $3.6 billion of debt issued by the Houston-based company's Dynegy Holdings unit, which the plaintiff bondholders own.

Icahn, the activist investor, has a 14.7 percent equity stake in Dynegy and is the company's largest shareholder, regulatory filings and Reuters data show.

In their complaint dated Wednesday, Avenue Investments LP, Caspian Capital LP, Oaktree Capital Management LP and Western Reserve Life Assurance Co said Dynegy Holdings sold its equity interest in coal assets to the parent for "an unsecured and potentially hollow" promise to receive payments over 15 years.

They said this transfer ensured that Dynegy Holdings would not have enough assets to satisfy claims of bondholders, leaving them the "untenable" choice of remaining Dynegy Holdings creditors or accepting a coercive debt swap.

Dynegy undertook the restructuring "for no reason other than to benefit the parent's equity holders, prominent among them Carl C. Icahn," the complaint filed in the New York State Supreme Court in Manhattan said. The bondholders seek to undo the asset transfers and recover other damages.

Katy Sullivan, a Dynegy spokeswoman, said the company is reviewing the complaint and does not comment on litigation. Icahn did not immediately respond to a request for comment. He is not a defendant in the case.

Earlier this month, Moody's Investors Service said Dynegy Holdings' low "junk" credit ratings reflect "extraordinarily high" challenges the company faces over the next 12 to 18 months. It also said there is "the continued prospect of one or more bankruptcy filings within the Dynegy family."

In afternoon trading, Dynegy shares were down 34 cents, or 6.7 percent, at $4.74 on the New York Stock Exchange.

The case is Avenue Investments LP et al v. Dynegy Inc et al, New York State Supreme Court, New York County, No. 652599/2011. (Reporting by Jonathan Stempel in New York; Editing by Derek Caney and John Wallace)

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