(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.