(The following was released by the rating agency)
March 1, 2011--Standard & Poor's today lowered the corporate
credit rating of Dynegy Inc. to 'CCC' from 'B-'. All ratings are
off CreditWatch with negative implications, where it was placed
on Aug. 17, 2010. The outlook is negative. The '1' recovery
rating on the company's secured revolving credit facility and
synthetic letter of credit facility and the '3' recovery rating
on the unsecured notes are affirmed.
"The downgrade reflects the plethora of challenges facing
the company -- weak cash flows, the risk of a covenant default
in June 2011, wholesale management turnover, and the company's
need to renew its revolving credit facility in 2012," said
Standard & Poor's credit analyst Swami Venkataraman.
The fall in natural gas prices due to the recession and the
growth of shale gas and the consequent compression in dark
spreads (the difference between power prices and the cost of
coal and emission credits for coal-fired generators) has
resulted in a sharp decline in cash flows for Dynegy. At these
cash flow levels, given Dynegy's leverage, the company may fail
to meet the 1.4x EBITDA/interest covenant for its secured
revolving credit facility for the quarter ended June 30, 2011.
For these reasons, management sought to take the company
private and find a way to eliminate the covenant default risk.
But shareholders rejected two such offers as being inadequate.
The first was from the private equity firm Blackstone Group
(which planned to sell assets to raise liquidity), and the
second was from investor Carl Icahn (who promised to extend a
line of credit to Dynegy).
Shareholders' rejection of management's plans has led to the
resignation of not only the CEO and CFO but also the entire
board, effective at the next shareholder meeting in 2011. This
wholesale management turnover also poses governance risks.
If management succeeds in avoiding the covenant default and
succeeds in retaining its bank lines then, liquidity is
sufficient, in our view, and not a major concern in this
declining- or low-price environment and will become important
only when commodity prices rise again.