Monday, January 4, 2010

Expensive deleveraging at Dynegy (DYN)

Dynegy announced today that they've completed a debt reduction transaction that was previously announced in December:


"HOUSTON--(BUSINESS WIRE)--Dynegy Inc. (NYSE: DYN - News) announced that on December 31, 2009, its wholly-owned subsidiary, Dynegy Holdings Inc. (“DHI”), completed the funding of the previously announced repurchase of 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, was approximately $875 million."


This transaction will reduce annual interest by about 10cents per share.  Great.  Unfortunately - as has been the case with many companies who've retired debt recently - Dynegy has demonstrated quite clearly that it is in the energy business, rather than the bond-trading business.  The price to retire debt, after pulling out a little fee for the bankers, implies they paid about 104cents on the dollar to retire these notes.  That would be about where the bonds have traded as of late, but far higher than prices a few months ago below 90cents on the dollar:





I asked a company spokesperson about the rationale here, especially given the premium price.  These 2012 notes traded significantly lower just a few months ago, so this trade is a massive windfall for the "large investor" on the selling end of the trade.  The Dynegy spokesperson said that it was in line with the company's debt reduction strategy, and that with this action they don't have any debt coming due before 2015.  With that and the savings on interest expense, it's not at all a bad move to retire this debt - I just hate to see companies handing over a  windfall  to anyone, be it a banker or investor.


Dynegy shares are up 4% today, but still only fetch a fraction of their previous highs.  Much of the reason for their low share price has been the toxic combination of a high debtload combined with weak operating results.  Their results have been hurt in part due to their profile of energy assets.  A large portion of their production is tied to "intermediate" and "peaking" production times and their associated high rates.  That's great in times of big energy usage, but is crippling in times of slack economic output, as their more expensive energy-producing assets are largely dormant:



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