Moody’s Investors Service on Tuesday said it was maintaining a “developing” outlook on Dynegy Inc. and its subsidiaries following the company’s pricing for $1.45 billion of new second priority senior secured notes and $175 million of convertible subordinated debentures (see Daily GPI, Aug. 4).

Once the financial transactions are completed, Dynegy will have no significant public debt maturities until July 15, 2008, according to Moody’s. However, Dynegy still would have to refinance or replace its $1.1 billion secured revolving credit facility by Feb. 15, 2005; a $170 million CoGen Lyondell credit facility by Aug. 11, 2005; and the remaining outstanding balance on its $360 million term loan by Dec. 15, 2005. In addition it must continue to amortize the $17 million per quarter of Project Alpha debt and absorb the negative cash impact of its remaining tolling agreements.

“These factors, as well as debt levels that remain high, minimal amounts of free cash flow and ongoing litigation, all contributed to Moody’s decision to maintain a developing outlook,” analysts said. “Moody’s will continue to assess Dynegy’s success in addressing these issues and will consider a positive ratings outlook or possibly a review for a one-notch upgrade once there is a greater degree of certainty surrounding the company’s ability to refinance its remaining maturities in 2005; its ability to maintain adequate liquidity; and its ability to meet or exceed projected operating results over the near to medium term.”

Successfully completing its refinancing and stock restructuring “does provide clarity around a significant portion of the refinancing challenges the company faced in 2004-2006, [but] it doesn’t address the significant amount of debt remaining in Dynegy’s capital structure,” Moody’s noted. “Reducing the $1.5 billion in preferred stock held by ChevronTexaco to $850 million is a positive development, but significant incremental debt reduction is still needed.”

Moody’s estimates Dynegy will have approximately $8.2 billion of debt once its refinancings are completed. “Furthermore, maintenance levels of capital spending and cash interest costs are likely to consume the bulk of the cash flow generated from operations, resulting in limited amounts of free cash flow available for material amounts of debt reduction. Therefore, total leverage will continue to be a key ratings consideration that will likely limit the upside in Dynegy’s ratings over the near to medium term.”

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