Dynegy Shakes Off Junk Jolt
thestreet.com
Dynegy Shakes Off Junk Jolt
By Melissa Davis
Staff Reporter
06/28/2002 05:46 PM EDT
Dynegy (DYN:NYSE - news - commentary - research - analysis) on Friday slipped
into junk credit territory, but its stock was cushioned by a market clearly braced for
the fall.
After a brief dip on news of the Moody's downgrade, Dynegy's stock shot back up
to recapture -- and even expand on -- its earlier gains of the day. Shares of the
embattled Houston energy trader soared $1.12 to finish Friday at $7.20.
Following the lead of Fitch on Monday, Moody's withdrew its investment-grade
rating for Dynegy over a myriad of concerns. The ratings agency cited as a primary
worry the execution risks associated with Dynegy's plan to bolster its balance
sheet by $2 billion by the end of the year. Moody's also described Dynegy's current
liquidity as "considerably weaker than it has been historically."
After Moody's issued its report, however, Dynegy announced that it had secured
$250 million in interim financings through a loan against a planned asset sale.
Before that, Dynegy had only $720 million in cash and credit available, with a $350
million debt obligation looming in July and other cash requirements threatening to
eat at its liquidity.
The company still faces challenges in renewing nearly $2 billion worth of credit
facilities over the next year. In the meantime, Moody's said, Dynegy's marketing
and trading business continues to suffer from a lack of counterparty and investor
confidence.
But analysts agreed that Moody's downgrade -- and even much of its concerns --
had already been digested by the market.
"I think management and the Street had realized for quite some time that this was
probably going to happen," said Mark Easterbrook, an analyst at RBC Capital
Markets in Dallas and an owner of the stock. "The company probably already
discussed the possibility with customers, who've asked for more collateral or are
no longer trading with Dynegy. But I think the impact is already there."
Anne Falgoust, an analyst at Johnson Rice in New Orleans, said the next few
quarters should tell the whole story.
"The company has said it has enough liquidity to collateralize its book and
continue trading," said Falgoust, who owns no stock in the company. "But we'll
have to wait and see what kind of impact this has on their operations and whether
or not it affects their counterparties.
"That's certainly a big question right now."
Questions also linger around a key component of the restructuring plan designed to
restore Dynegy's credit quality. The plan is heavily dependent on asset sales, the
most crucial being Dynegy's 50-percent stake in Northern Natural Gas. Dynegy
purchased its share of the asset with cash provided last year from ChevronTexaco,
which is scheduled to collect $1.5 billion in preferred securities proceeds from
Dynegy next year. Because of Dynegy's obligation to ChevronTexaco, Moody's
believes there is a "good possibility" that Dynegy will be forced share at least some
of the proceeds from the asset sale with ChevronTexaco instead of using it all to
bolster its own financial health.
Still, Dynegy's relationship with ChevronTexaco remains a strength in Moody's
eyes. The larger company has stepped in to offer leadership during Dynegy's
recent weeks of turmoil.
"Moody's continues to consider ChevronTexaco's ownership interest, commercial
relationships and board representation critical to Dynegy's ratings," the agency
stated. "If those relationships weaken, additional negative ratings pressure will
result."
Moody's outlook for Dynegy's credit continues to be negative. |
