Dynegy, creditors discuss unit's bankruptcy-sources

Mon Oct 24, 2011 6:48pm EDT

* Dynegy shops unit's prepackaged bankruptcy

* Dynegy finds little support for bond swap

* Bondholders may use bankruptcy to fight asset shuffle

By Tom Hals and Michael Erman

Oct 24 (Reuters) - Debt-laden independent power producer Dynegy Inc has been discussing with bondholders a plan to put a subsidiary into bankruptcy after bondholders shunned a $1.25 billion refinancing, sources told Reuters.

The company has been struggling with a mountain of debt and its power business has been squeezed by rock-bottom natural gas prices.

The proposed bankruptcy would not affect parent company Dynegy Inc, whose shareholders include billionaire investor Carl Icahn and investment firm Seneca Capital. The sources said the bankruptcy would be limited to Dynegy Holdings, which issued $3.5 billion of unsecured bonds and faces more than $700 million in lease payments over the next five years.

Katy Sullivan, a Dynegy spokeswoman said, "Management is evaluating a range of options to manage Dynegy's debt, including the current exchange offer."

The company recently offered bondholders $1.25 billion of cash and new secured notes for outstanding bonds, but that offer has failed to garner much support and the deadline has been expected twice. The latest offer expires Thursday at midnight.

The sources said it is not clear that the Dynegy Holdings will end up in bankruptcy and bondholders are looking at all their options.

Bondholders such as hedge fund Avenue Capital Group have been angered by a recent shuffling of assets that has put most of the company's power plants beyond their reach. They have refused the bond swap offer, which demands bondholders accept discounts of 30 percent or more on their current holdings.

"The bondholders are saying, 'You know what? We'll do better in bankruptcy," said CreditSights analyst Andy DeVries. "They're saying: 'Bring it on.'"

The asset shuffling left Dynegy Holding with the bond debt and two unprofitable leased power plants. Bankruptcy would allow Dynegy Holding to restructure the two power plant leases, but it might also give bondholders a way to challenge the asset shuffling that they have said amounted to asset stripping to benefit shareholders.

DeVries said the ultimate goal of hedge fund bondholders such as Avenue Capital, which does not shy away from bankruptcy battles, may be to use Chapter 11 to unwind the asset reshuffling and seize the power plants for itself.

Dynegy has been at the center of two recent takeover fights that were defeated by shareholders looking for more value.

Icahn was unable to buy the company for $5.50 a share, or $665 million in February. Private equity firm Blackstone Group previously failed to convince shareholders to sign on to its $5-a-share bid.

The company's top management, which argued that Dynegy faced serious risks if it remained a stand-alone company, resigned after the Icahn bid fell apart.

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