Monday, December 14, 2009

Dynegy takes the wrong side of the trade by reducing debt. (DYN)

De leveraging is a GOOD thing, right?

Yeah I guess so.  Houston electric utility Dynegy (DYN) announced today that they're reducing their debtload:

HOUSTON--(BUSINESS WIRE)--Dynegy Inc. (NYSE: DYN - News) today announced that its wholly-owned subsidiary, Dynegy Holdings Inc. (“DHI”), has negotiated an agreement to repurchase from a fixed-income investor approximately $420 million of its outstanding 6.875 percent Senior Unsecured Notes due 2011 and approximately $410 million of its outstanding 8.75 percent Senior Unsecured Notes due 2012. This represents 83 percent of the company’s Senior Unsecured Notes due 2011 and 2012. The total consideration to effect the transaction, inclusive of consent fees, will be approximately $875 million. The transaction is expected to fund by December 31, 2009.

“This transaction will significantly reduce the company’s debt obligations in 2011 and 2012, while also reducing interest payments and eliminating refinancing risks associated with our near-term debt profile,” said Holli C. Nichols, Executive Vice President and Chief Financial Officer of Dynegy Inc. “With reduced near-term debt obligations through 2012, we are better able to weather near-term market uncertainty without a pressing need to access the capital markets.”

I like a clean balance sheet, and this is a step in that direction.  But the seller of these notes DEFINITELY was the winner in this transaction.  Over the last few days, the 6.875% notes due 2011 have traded between 102-104cents on the dollar, for an effective yield as low as 3.2%!!!  At those rates, wouldn't you rather be ISSUING debt, rather than retiring it?  Or at least replacing debt with low yields and extended maturities.  The prices cited in the press release above look like Dynegy is paying 104cents or more per dollar to retire this debt.  Expensive!

Copyright 2009 AlphaNinja

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