Dynegy Inc. and its subsidiaries received welcome news from Moody’s Investors Services on Thursday that their credit rating outlook improved to “developing” from “negative.” The action followed the Houston-based company’s announced refinancing and restructuring plans earlier this week (see Daily GPI, July 16).

John Diaz, managing director of Moody’s Corporate Finance Group, wrote that the developing outlook reflected Dynegy’s announced transactions — still not completed — uncertainty on the size of its debt offerings and the ongoing need to reduce its total debt. “If Dynegy is successful,” and there is a “fairly high” probability, “Moody’s will likely consider changing the outlook to positive or possibly reviewing the ratings for a one-notch upgrade.”

Diaz said successful execution of its plan would improve Dynegy’s debt maturity profile for several years. However, he added that the transactions fail to address the “significant amount of debt remaining in Dynegy’s capital structure” adding that incremental debt reduction is still needed. “Moody’s estimates Dynegy will have approximately $8.2 billion of debt once the 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.”

Total leverage, said Diaz, 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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