The recent bond offering and stock refinancing by Dynegy Inc. mitigated some concern on the company’s near-term liquidity position and financial flexibility, but they haven’t led to a change in its overall credit quality, Standard & Poor’s (S&P) analysts said Friday.

An upgrade to Dynegy’s credit quality will come, said analysts, when the company shows the ability to generate stable, sustainable cash flow. “Furthermore, the firm will be challenged to generate a sufficient level of cash flow to repair its leveraged balance sheet.” In a similar assessment a few days ago, Moody’s Investors Service said it would maintain a “developing” outlook on the company (see Daily GPI, Aug. 7).

In the days since the offering was announced, Dynegy’s stock has teetered, falling below $3 for the first time since April. On Friday, it lost 15 cents to end the day at $2.85. The company has scheduled a conference call to discuss its second quarter earnings and the bond offering on Tuesday (Aug. 12).

The credit reviews followed Dynegy’s announcement to sell some bonds and restructure its stock offering with major shareholder ChevronTexaco Corp. (see Daily GPI, Aug. 4). The offering is scheduled to close Monday (Aug. 11). S&P assigned a “B-” rating to Dynegy Holdings Inc.’s recent junk bond offering and a “CCC+” to Dynegy Inc.’s convertible debt notes that are due in 2023. It also raised the bank loan rating on Dynegy Holding’s $1.3 billion credit facility and term loan B to “BB-” from “B+.”

“Standard & Poor’s views these transactions as an enhancement to credit quality because it provides clarity regarding the $1.5 billion convertible preferred security due in November 2003,” analysts said. Furthermore, because the tender offer for the 2005-2006 bonds was approximately 90% successful, near-term refinancing risk has been reduced.”

These transactions mitigate some concern regarding Dynegy’s financial flexibility and near-term liquidity position, which is about $1.6 billion in cash and availability under its credit facility, but do not facilitate a change in overall credit quality. Still, Standard & Poor’s views Dynegy’s ability to generate stable, sustainable cash flow as a key concern for credit quality. Furthermore, the firm will be challenged to generate a sufficient level of cash flow to repair its leveraged balance sheet.

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