While Wall Street analysts and ratings agencies with post-Enron jitters were coming down hard on Dynegy Friday, traders in the market brushed aside the latest ratings changes, saying they had no problems with the veteran marketing company as a counterparty.

“Almost certainly we won’t change trading with Dynegy. They have too many assets to be in danger,” a source with a major marketer told Daily GPI. Another large seller commented, “Dynegy is not at risk right now. If they got downgraded [to junk status], it would be a different story. But for right now they’re OK with us.”

Another long-time market-watcher, apparently exasperated with Wall Street, said they “saw no problem with Dynegy. It’s always been a straight-up company. Raymond Plank (Apache chairman who criticized Dynegy — see Daily GPI, April 25) hasn’t liked them for the last 10 years, maybe more. But that could be a good thing. And the analysts are spooked because they’ve been roasted over Enron, so they’re going overboard the other way with Dynegy. Makes you wonder if they’ll ever get it right.”

Daily GPI checked in with the market after both Standard & Poor’s and Moody’s Investors Service had worried that negative news and ratings warnings would make counterparties back off or call for collateral.

S&P said Friday that its April 24 ratings downgrade and negative outlook assignment on Dynegy Inc. and its subsidiaries are the agency’s current view and already reflect the items discussed in the company’s teleconference Thursday, including “concerns regarding issues in the 8-K filing and the write-down of goodwill associated with Dynegy’s telecommunications unit.”

Dynegy’s stock has lost about 45% of its value, from about $27 to a $14.90 close Friday, since the company held a teleconference Thursday to discuss its earnings projections scheduled for release April 30, as well as explain an informal inquiry being conducted by the Fort Worth office of the Securities and Exchange Commission regarding a natural gas contract last year (see Daily GPI, April 26). Following the Thursday announcements, Moody’s Investors Services said it was “reviewing” Dynegy’s ratings for a possible downgrade, and the stock sell off began.

In afternoon trading Friday, Dynegy was the biggest loser on the New York Stock Exchange, and one of the most actively traded issues, on volume of 19.38 million shares. The last time it closed lower than Friday was April 14, 1999 when the stock was $14.81.

Dynegy will be negotiating with its credit facilities in early May to renew $1.5 billion in revolving credit, which was set to expire in May. On Thursday, CFO Rob Doty said he did not think it would be a problem for the credit facilities to be renewed, however, any downgrades could lead to demands for collateral or higher interest terms.

When asked how the company was responding to the plethora of bad news, spokesman John Sousa was upbeat. He said the company remained “healthy, vibrant and viable” with a reminder that it had a proven business model and strong assets. Sousa also affirmed that the company’s core energy businesses were “performing very well…we have strong liquidity and cash flow to operate our business.”

Mike Mott, Dynegy’s controller and a senior vice president, said the recent events followed a “solid business purpose…to acquire a gas supply,” which he said was done in a tax-efficient way for the company. “There are no sweetheart deals,” said Mott, who explained that no Dynegy employees were involved and there were no affiliates of the company involved.

S&P analyst John Kennedy affirmed the company’s liquidity in his report. “Dynegy currently has about $1.7 billion of cash and available bank facilities that have no material adverse change clauses embedded in the agreements,” Kennedy said. “Although about $1.5 billion of these bank lines expire by May 20, 02, and the firm may face more onerous terms to extend or renew its bank agreements, Dynegy does have a 364-day term-out provision on its bank lines, which could mitigate some of the near-term concerns over its liquidity position. However, if this additional debt became a permanent component of the firm’s capital structure, and not repaid or replaced with equity in the intermediate term as would be expected, ratings would likely be lowered.”

The key to the problem is the fact that if Moody’s does downgrade the company, it would be to junk status, which could cause counterparties to require collateral. Kennedy said the agency had “often observed that rating triggers limit a company’s flexibility and can amplify the seriousness of credit quality deterioration and contribute to a ratings cliff.” Dynegy, he said, had “exhibited commercial strength in its wholesale energy merchant business,” but noted that a “lack of counterparty confidence could result in lower trading volumes, which could, in turn, affect the firm’s financial performance.”

Dynegy saw its stock downgraded by several analysts on Friday, including Bank of America, to market perform from buy; JP Morgan Chase, to market perform from long-term buy; Salomon Smith Barney, to neutral from buy; Wachovia Securities to market perform from strong buy; and Credit Lyonnais, to hold from add. Credit Lyonnais had rated Dynegy a buy just two weeks ago. All of the downgrades noted an ongoing review of Dynegy’s credit rating by Moody’s Investor Services.

However, Merrill Lynch on Friday reiterated its “strong buy” recommendation, and Goldman Sachs & Co. upgraded Dynegy to market outperform from market perform. Merrill analyst Carl Kirst said Thursday’s market reaction, when Dynegy’s stock dropped 30%, was “justified,” but said, “we are also on guard against whipsawing opinions on…overwhelming negative psychology. The question is, where do we go from here?”

S&P’s Kennedy said, “a lack of market confidence or the risk that another rating agency would lower Dynegy’s credit ratings to non-investment grade could spur liquidity issues, as counterparties demand increases in collateral to maintain trading relationships.” He said liquidity positions “can become stressed due to ratings triggers embedded within securities and trading contracts. This liability could exceed $300 million, the bulk of which would be used to collateralize Dynegy’s netted wholesale trading book.” Kennedy said the ratings agency would continue to monitor Dynegy’s liquidity position and flexible financing needs for current and contingent liquidity and collateral requirements.

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