Dynegy Holdings LLC Bonds (DYN.HQ)

[Enterprising Investor]

Judge Sends Dynegy Holdings Bankruptcy Plan for Creditor Vote (7/02/12)

A judge on Monday said Dynegy Holdings LLC can send its latest restructuring plan to creditors for a vote, a major step toward exiting an eventful and often contentious Chapter 11 proceeding for the power provider.

Judge Cecelia G. Morris of U.S. Bankruptcy Court in Poughkeepsie, N.Y., approved Dynegy Holdings' disclosure statement, a plain-language outline of a company's bankruptcy proposal on which creditors must vote. The plan gives unsecured creditors most of the equity of Dynegy parent company Dynegy Inc. (DYN), a deal reached earlier this year after an independent examiner's report all but forced the company to scrap a deal that would have been kinder to the parent company's equity holders.

Judge Morris asked both Dynegy Holdings and Dynegy Inc. lawyers for details about plans to merge the two entities eventually, which a lawyer for Dynegy Inc. strongly indicated would include a bankruptcy filing by Dynegy Inc. The judge was adamant that she wasn't ruling on Dynegy Inc. matters at Monday's hearing. A hearing discussing a merger of the two, with Dynegy Inc. being the "surviving entity," is set for July 9.

"I can't approve what's not here," Judge Morris said of the parts of the disclosure statement that mentioned Dynegy Inc. The judge didn't want to approve anything that could be construed as signing off on any terms related to a still-unfiled bankruptcy by Dynegy Inc.

Judge Morris was worried that "this is an attempt to make [Dynegy Inc.] a [prepackaged bankruptcy]," adding that she didn't think that was appropriate. A prepackaged bankruptcy is filed with substantially all the support of creditors from the beginning of the case. Her chief concern was that her approval Monday would be construed as sending Dynegy Inc.'s bankruptcy plan to creditors for a vote before it's even filed.

"I'm not trying to be cranky about this," Judge Morris said. The U.S. trustee's office, a Justice Department bankruptcy watchdog, also had issues with the Dynegy Inc. involvement but worked them out with Dynegy before the hearing.

Independent examiner Susheel Kirpalani's March report, which bashed Dynegy Holdings' pre-bankruptcy transfer of coal assets to Dynegy Inc., threw Dynegy's already contentious case into more disarray. But after Judge Morris ordered mediation sessions with Mr. Kirpalani himself, the company in April disclosed a deal with most objecting groups to shift the coal assets back to creditors.

In all, the holding company's unsecured creditors will get a 99% stake in the parent company. Current Dynegy Inc. shareholders initially would receive 1%, plus warrants to potentially boost their stake to 13.5% over five years.

It includes a deal with a unit of U.S. Bancorp (USB), the representative of holders of bonds secured by leases of two Dynegy's power plants. U.S. Bank had previously sued over the asset transfers but has agreed to drop the lawsuit in exchange for a $540 million claim plus as much as $31 million more if the two plants, called Roseton and Danskammer, are sold.

A group of subordinated noteholders, who say they are owed more than $220 million, will divvy among themselves about $55 million, good for about 25 cents on the dollar. As part of that settlement, two hedge funds that hold those notes will get their legal fees paid by Dynegy Holdings LLC's estate.

Dynegy Holdings filed for Chapter 11 protection in November 2011 to restructure billions of dollars in debt in bankruptcy court and get out of the two burdensome power-plant leases. The transfer of the coal-powered plants from Dynegy Holdings to Dynegy Inc. in September left the subsidiary's bondholders owed roughly $4 billion without a claim on those plant assets.

Dynegy Inc. then put Dynegy Holdings and related subsidiaries in bankruptcy, a move that hurt bondholders without affecting the parent's shareholders, leading to the examiner being appointed. Those shareholders include Carl Icahn, with two seats on the company's board.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)