Analysis: Bondholders warm to unusual Dynegy bankruptcy

WILMINGTON, Delaware Fri Nov 11, 2011 2:27pm EST

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WILMINGTON, Delaware (Reuters) - The bankruptcy of a unit of Dynegy Inc (DYN.N) has turned the usual order of payment for creditors upside down, as the power company tries to protect shareholders like billionaire financier Carl Icahn at the expense of bondholders.

But prices have been rising on Dynegy bonds, suggesting that at least some bondholders are warming to the arrangement.

Dynegy Holding LLC filed for bankruptcy on Monday. The company, whose assets include two unprofitable leased power plants, is asking its bondholders to accept a deal worth 90 cents or less on the dollar. Shareholders of parent Dynegy Inc, which remained out of bankruptcy, will be unscathed.

Dynegy said holders of $1.4 billion of its more than $4 billion of debt had backed the proposed deal -- far short of the two-thirds it would probably need to win court approval.

Yet one credit analyst said he expected Dynegy to win enough support, and bondholder sources said the Houston-based company was making progress.

Dynegy recently moved many choice power plants beyond the reach of bondholders, taking advantage of the bonds' lack of protections that normally prevent such maneuvers.

"You've got to hand it to Icahn," said CreditSights Inc analyst Andy DeVries. "They did some great financial engineering. They took advantage of the fact the bonds had no covenants so bondholders couldn't stop them, and they got a pretty good settlement for both parties."

Icahn is Dynegy's largest shareholder, with about a 15 percent stake, and has been leading the restructuring efforts.

In afternoon trading, Dynegy shares were up 6 cents at $3.02. They had closed last Friday at $3.30, before reports surfaced of a possible bankruptcy filing.

SHEDDING LEASE PAYMENTS

Because it calls for shedding onerous lease payments, Dynegy's proposed bankruptcy plan could benefit bondholders and shareholders.

If power prices begin to recover, there could be handsome returns for Icahn and other shareholders such as hedge fund Seneca Capital.

Bondholders could benefit by receiving new debt with better protections. If Dynegy does not turn around and pay off its new convertible notes by the end of 2015, bondholders will get virtually all its stock, as some have long sought.

Backing the plan are Franklin Advisers Inc, a large Dynegy bondholder and its third-largest stockholder, and a group of hedge funds led by Avenue Capital Group.

Franklin and Avenue declined to comment. Icahn was not immediately available.

Bondholder sources said backing for the proposed plan went beyond the $1.4 billion of committed support.

One source, who requested anonymity because of a lack of authority to speak for bondholders, said few of the scores of them that participated in a conference call this week to discuss the bankruptcy opposed the proposed deal.

The source said one bond investor who backs the plan did not publicly sign on, leaving open a chance to win a potentially influential seat on a Dynegy committee for unsecured creditors.

That committee may try to attack Dynegy's shuffling of assets as a fraudulent conveyance, which a bankruptcy judge can undo. Similar lawsuits have recently been brought against the deal in New York state court.

"Dynegy looks forward to working with our stakeholders to complete and implement this restructuring support agreement as quickly and efficiently as possible," the company said when Reuters requested a comment.

REQUEST MADE FOR EXAMINER

CreditSights' DeVries said Dynegy is not certain to emerge from bankruptcy by August, as it hopes to do.

The company "likes to pitch this as 'It's going to be perfect and we're going to come out of bankruptcy soon,' but history is not on their side," DeVries said.

He compared it with another power company, Mirant Corp, which entered bankruptcy in 2003 with a prepackaged reorganization plan, only to linger in Chapter 11 until 2006.

Bondholders who could suffer large losses, and entities with interests in leases that Dynegy proposes to break, are the most likely opponents of Dynegy's plan.

On Friday, a bond trustee responsible for the financings of two power generating plants in Newburgh, New York asked the court to appoint an examiner, calling the asset transfers unfair to Dynegy Holdings and its creditors.

A lawyer representing lease investors told a bankruptcy court in New York this week that they also plan to seek the appointment of an examiner.

An examiner could investigate Dynegy's asset shuffling and examine any potential allegations of misconduct, such as fraud or mismanagement. A finding of something amiss could undermine support for the proposed bankruptcy plan.

The request for an examiner could also be a negotiating tool, and it could be withdrawn if progress were made in negotiations.

DeVries noted that prices of securities tied to the leases have risen to a level suggesting that holders anticipate a higher recovery than the $300 million that has been proposed.

The case is In re Dynegy Holdings LLC, U.S. Bankruptcy Court, Southern District of New York, No. 11-38111.

(Reporting by Tom Hals; Editing by Lisa Von Ahn, Phil Berlowitz)

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