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Dynegy plan to restructure Genco debt could add significant share value

DynegyInc.'s plan to restructure $825 million in unsecured debt ataffiliate Illinois PowerGenerating Co., or Genco, is viewed as a positive move by WallStreet that could add significant share value.

A tentativeagreement to restructure the debt was reached between Dynegy, Gencoand an ad hoc group of Genco bondholders, according to an Oct. 3 announcement.

SunTrust Robinson Humphrey analyst Ali Agha said in aresearch report that the deal implies the potential for $3 per share ofincremental equity value for Dynegy's stock, which closed at $12.39 on Sept.30, and was up more than 4% higher in late trading Oct. 3.

Under the proposed restructuring, $825 million in existing2018, 2020 and 2032 Genco notes will be exchanged for $210 million in newseven-year Dynegy unsecured notes; a $139 million cash consideration, fundedwith existing Illinois PowerHoldings LLC cash balances and collateral synergies; and 10 millionDynegy warrants with a seven-year tenor and strike price of $35 per share.

Essentially, the deal involves a $615 million reduction indebt at Dynegy in exchange for the $139 million cash payment, which will befunded by its ring-fenced IPH subsidiary and not come from Dynegy's balancesheet, executives confirmed on an Oct. 3 conference call.

"IPH has sufficient cash on hand to pay the cashportion of the transaction consideration and cover adviser expenses. Thebalance will be returned to Dynegy," Dynegy President and CEO RobertFlexon said on the call. "Assuming $30 million in cash is returned toDynegy, the incremental net debt taken on by the parent company is $180million."

The restructuring does require the approval of 67% ofoutstanding noteholders, and Dynegy executives said the current ad hoc groupinvolved in the preliminary agreement represents 64% of Genco bonds. Thecompany plans to execute either anout-of-court restructuring or a prepackaged Chapter 11 bankruptcy filingdepending on noteholder approval.

Dynegy would need97% participation to execute the exchange out of court. If the company fallsshort of the two-thirds approval needed for the prepackaged deal, executivesnoted they can move forward through a regular restructuring or continueadvocating for noteholder participation through the bankruptcy process.

"We expect the agreement with the ad hoc group to befirmed up in the next few days, and a final restructuring to be completed byyear-end 2016," Agha wrote in the research note.

Dynegy said in May that it was IPH's Gencosubsidiary on the heels of announcing the shutdown of 1,835 MW of coal capacity in southernIllinois. Flexon said on an earnings call that the company planned to beginnegotiating with the debt holders and reach a solution this year that wouldlikely either result in a "more sustainable business model" or in thedebtholders taking ownership of the Genco assets: the 1,230-MW plant, the 915-MWCoffeen plant andits 1,023-MW stake in the Joppa Steam coal and gas plant.

Dynegy executives said the details of the restructuring wererequired to be made public per the terms of the nondisclosure agreement betweenGenco and the ad hoc group of noteholders.

"[W]e believe it was a welcome update on the process asleverage and uncertainty around IPH are the two primary concerns amongstinvestors," Guggenheim Securities LLC analyst Shahriar Pourreza wrote inan Oct. 3 research report. "[A]t the end of the day, this is a moreappropriate structure for what we acknowledge are lower quality assets as theystill generate cash, and we appreciate continued effort to remove uncertainty,cost, and complexity from the business."

Evercore ISI analyst Greg Gordon said the deal "willeffectively consolidate ownership" of IPH at Dynegy. In addition,consolidated interest costs will drop to approximately $15 million per yearfrom $59 million per year on the $825 million of Genco debt, "creatingover a $40 million improvement in annual free cash flow," Gordon wrote.

The analyst noted that the restructuring "theoreticallycreated" approximately $450 million of equity value or approximately$3/share based on the Sept. 30 close for Dynegy stock.

Evercore, SunTrust and Guggenheim all have a "buy"rating on Dynegy stock.