Analysis: Dynegy’s bankruptcy warning merely talk, for now

By Caroline Humer and Tom Hals

NEW YORK/WILMINGTON, Delaware (Reuters) – Dynegy Inc’s (DYN.N: Quote, Profile, Research) bankruptcy talk may be just that — at least for the moment.

The struggles of the third-largest independent power producer have sent an army of restructuring advisers scrambling for its business.

The company’s balance sheet suggests that those advisers might not be needed in the near-term. But without a sharp rebound in natural gas prices, consultants could be eyeing a full-blown restructuring or bankruptcy in a few years.

Dynegy warned in March that soon it would likely be in technical default because it expects to breach a covenant agreement with its lenders that requires it to meet increasingly restrictive targets related to cash flow and debt.

The Houston-based company said that if it could not amend or replace its lending agreement, liquidity could dry up and force it into bankruptcy, capping a long slide for a company that 10 years ago tried to take over its bigger peer Enron Corp.

That deal, which would have made Dynegy one of the biggest corporations in America, was quickly undone by Enron’s accounting scandal.

Analysts characterized the bankruptcy warning as the work of cautious auditors, and were quick to point out that the technical default primarily affects a $68 million term loan, a tiny portion of Dynegy’s overall debt.

“The lenders are getting paid,” said Brandon Blossman, an analyst with Tudor Pickering Holt & Co LLC, an investment bank focused on energy, “so it’s less dire of a situation.”

A bankruptcy filing also seems unlikely as it could wipe out the biggest shareholders, Seneca Capital and billionaire Carl Icahn, at a time when they are locked in a power struggle to exert the most influence over Dynegy.

Seneca has blocked two attempts to sell the company — most recently to Icahn for $665 million — and has argued that the company’s value will increase as commodity markets recover and as costs are cut.

On Monday, Seneca’s board nominee Hunter Harrison was named interim president and chief executive officer.

Icahn recently gained two board seats and Vincent Intrieri, a senior managing director at Icahn Capital, was elected chairman of the Dynegy board’s special committee for finance and restructuring.

A Dynegy spokesman did not comment on the work of the committee and would not speculate on the prospect of a bankruptcy.

LOOMING WALL OF DEBT

The company has roughly $4.8 billion in debt. However, much of it is unsecured, so it has plenty of assets it could pledge as collateral to lenders in return for modifying loan terms.

And through 2014, it faces debt maturities of $164 million or less each year, according to its regulatory filings. A bond due in 2012 trades near par, indicating investors expect to be repaid in full.

“The market is kind of saying they think they will get through the covenant issue. Those are small maturities and they will pay them off. Then the wall occurs in 2015,” said A.J. Sabatelle, an analyst with Moody’s Investors Service.

Dynegy’s debt maturities swell to $785 million in 2015 and $1.04 billion in 2016, according to its disclosures.

Restructuring advisers see Dynegy as an eventual candidate for their services because of those huge maturities combined with forecasts of low natural gas prices, which make its coal-fired plants less competitive.

In addition, many of Dynegy’s 17 power plants, which sell electricity into the wholesale markets, are in the Midwest, where electricity demand from factories remains sluggish.

Add in the cost of cleaning up its coal plants to meet increasingly stringent environmental standards, and analysts see at least a couple of years when it will need credit to make up for negative cash flows.

“A cash infusion would be something they would probably need to get through this,” said Gordon Howald, an analyst with East Shore Partners Inc, a research and brokerage firm. “The problem with a scenario like that is that you’re layering more debt on a company already overburdened with debt.”

In addition, its stock price is down about 98 percent from its peak a decade ago, giving it little room to raise money by selling new shares.

Moody’s recently said that one approach could be for the company to try to buy a substantial amount of its debt at a discount to try to pare its liabilities before 2015.

Dynegy’s ability to solve the debt problems in the coming years largely depends on power markets, which have been depressed by very low natural gas prices.

Tom Fogarty, president of the PNT Energy consulting practice, sees a Dynegy bankruptcy filing in several years, noting that competitors Calpine Corp (CPN.N: Quote, Profile, Research) and Mirant, now part of GenOn Energy Holdings Inc (GEN.N: Quote, Profile, Research), overhauled their finances in bankruptcy.

“Ultimately they will have to go through a Chapter 11 proceeding,” he said. “They are competing against cheap natural gas, and that’s tough.”

(Reporting by Tom Hals and Caroline Humer, editing by Gerald E. McCormick)

Analysis: Dynegy’s bankruptcy warning merely talk, for now