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Dynegy announces deal with creditors, but much remains to be ironed out

Dynegy has announced an “agreement in principle” with creditors holding more than $2.5 billion in claims in its Chapter 11 that would purportedly resolve all potential fraudulent conveyance and other avoidance claims in the case.

Based on a bankruptcy court hearing yesterday, however, it remains unclear at this point exactly where that agreement in principle will lead the company and its stakeholders.

The hearing was primarily to provide Bankruptcy Court Judge Cecila Morris with an update on the status of the ongoing mediation efforts in the case. As reported, Morris ordered the mediation following the filing on March 9 of a report from court-appointed examiner, Quinn Emanuel Urquhart & Sullivan partner Susheel Kirpalani, that found, among other things, that a series of restructuring transactions undertaken by the company in the summer and fall of 2011 constituted both actual and constructive fraudulent conveyances.

That report sent the company’s efforts to confirm its proposed reorganization plan off the rails, as the transactions that came under Kirpalani’s fire were critical parts of a complicated restructuring scheme that, in effect, left the shareholders of publicly traded parent Dynegy Inc. (which is not in Chapter 11) unimpaired, while demanding concessions from holders of some $4 billion in claims at subsidiary Dynegy Holdings (which is in Chapter 11). Resolving that core tension in a manner acceptable to creditors and shareholders, consistent with the requirements and objectives of Chapter 11, has proven to be a contentious and thorny problem.

Notwithstanding Dynegy’s optimistic announcement, in delivering his report to Morris this morning in a courtroom in lower Manhattan, Kirpalani, who is also leading the mediation, said, “Nobody’s raising a flag of victory here.”

Indeed, at times during the hearing even Morris seemed thrown off by the case and its complexity, interrupting Dynegy lawyer Matthew Clemente several times as he outlined the proposed terms of the settlement.

“This is all gibberish,” she said at one point, asking Clemente to slow down and restate several points.

The ‘agreement in principal’

In its press release, Dynegy said it “reached an agreement in principle with creditors holding over $2.5 billion of claims against Dynegy’s subsidiary, Dynegy Holdings,” adding that the agreement “contemplates the resolution of all disputes, claims and causes of action between Dynegy Holdings and Dynegy,” including the potential fraudulent conveyance and other avoidance claims arising out of Kirpalani’s report.

The company also said that under the deal, all claims and causes of action against the directors, officers, employees, attorneys, and advisors of Dynegy, Inc. and Dynegy Holdings, who were alleged in the report of, among other things, breaches of fiduciary duties and ignoring conflicts of interest, would be released to the fullest extent permitted.

As for creditor recoveries, under the new agreement Dynegy Holdings’ unsecured creditors would receive common equity representing a 99% stake in the reorganized company, in lieu of the $1 billion in new senior secured notes and $2.1 billion of preferred stock contemplated by the current plan (for a more complete description of recoveries under the current plan, see, “Dynegy unit files Chapter 11 in latest bid to revamp unsecured debt,” LCD News, Nov. 8, 2011, and “Dynegy files new plan; senior note recovery range at 64-93%,” LCD News, March 6, 2012). Creditors would also receive $200 million in cash, down from $400 million under the current plan, with remaining cash balances being retained by the company for general corporate purposes.

Dynegy Inc., meanwhile, would receive 1% of the fully diluted common stock of the reorganized company, and five-year warrants to purchase 13.5% of the common stock of the reorganized company (on a fully diluted basis) to be exercisable at an equity value for the reorganized company of $4 billion.

Recovery rates for the revised distributions were not provided, and it was not clear precisely what effect the new capital structure would have on Dynegy’s reorganized enterprise value. For reference, however, Dynegy had said in its disclosure statement for the current plan that the company’s reorganized enterprise value, comprised of the equity value of Dynegy’s two operating silos (GasCo and OilCo), the value of certain hedges and NOLs and certain overhead costs related to operation of power plants, and restricted and unrestricted cash, was in a range of $2.146-3.304 billion.

Significantly, the new settlement also resolves disputes related to the company’s rejection of the leases for the Roseton and Danskammer power plants, which were the subjects of a 2001 sale-leaseback transaction. Under the deal, the operator of the plants, PSEG, will have an allowed $110 million tax indemnity claim, while the guaranty claim for the pass-through certificates issued to finance the transaction would be allowed in the amount of $540 million. Under the current plan, those two claims together were capped at $300 million ($400 million under certain circumstances). Further, according to the company, holders of the guaranty claims would be entitled to 50% of the proceeds from the sale of their assets, provided that their full recovery from all sources may not exceed $571 million. Other Dynegy Holdings unsecured creditors, meanwhile, would be entitled to the remaining 50% of proceeds.

‘Continuing to engage’

The company also said that the agreement in principle does not include any holders of Dynegy Holdings’ $200 million of subordinated debt, and this could be a fly in the ointment.

According to the company, distributions to subordinated debtholders would be subject to turnover pursuant to the contractual subordination provisions in the subordinated note indenture. Under the current plan, subordinated debtholders were entitled to a distribution provided that they first agreed to reduce their claims to 35 cents on the dollar. It is unclear whether that alternative treatment is also contained in the agreement in principle.

Even so, that is a recovery that subordinated debtholders have rejected from the get-go. In light of the new agreement, however, the potential for subordinated debtholders to derail the proposed settlement is a question mark. At this morning’s hearing, Andrews Kurth partner Paul Silverstein, who represents subordinated noteholders, tried to pick apart elements of the settlement, but Morris shut him down. The settlement presented today is in a very raw form, she said, and “we’re hearing it for the first time.”

Next steps

The company said the terms of the agreement in principle will be implemented through a settlement agreement to be filed in Dynegy Holdings’ Chapter 11, and in amendments to the company’s reorganization plan. The company said the pact remains subject to documentation that the company said it intends to file sometime this month.

The company further said, “In that regard, the parties are continuing to engage in discussions with other creditors, including the holders of the subordinated notes, in the hopes of obtaining as much consensus as possible with respect to the amended Dynegy Holdings plan.”

The next key dates for the company are May 2 and May 3, when hearings are scheduled on whether to appoint a trustee to manage the company and whether to extend the company’s plan-filing exclusivity period, respectively.

A final wild card is that Dynegy Holdings on March 27 apparently appointed an independent fiduciary, David Hirschberg, to evaluate the proposed settlement. According to Kirpalani, who disclosed the hire in court this morning, Hirschberg has not yet signed off on the new agreement. – Alan Zimmerman/John Bringardner

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