Standard & Poor's has downgraded Dynegy from BBB- to BB due to concern over the erosion in the company's core merchant energy business. Waning incremental cash flow, hurt by decreased market opportunities and lower power prices, has led to weakened credit protection measures more commonly associated with double-B credits.
Dynegy's liquidity is strained and, according to S&P, its ability to access the capital markets also is questionable given the company's floundering stock price and its difficulties in selling off its Illinois Power subsidiary. Although the company still has $900 million of liquidity, the amount is $500 million less than it was in April. Furthermore, it has $750 million in debt expiring in November.
While the company has been involved in cost saving efforts, including a reduction in capital expenditures, further cuts are necessary as Dynegy has predicted its net cash flow as a percentage of capital expense to weigh in at less than 60% of cash needs. The company also is undertaking plans to solidify its balance sheet, but the current market adds an element of risk to the execution. A company spokeswoman noted that Dynegy released a statement on the downgrade, in which interim CEO Dan Dienstbier said the company was committed to regaining its investment-grade status.
The Williams Companies also was downgraded to junk levels by S&P and placed on CreditWatch with negative implications. The company's senior unsecured debt rating was lowered from BBB- to BB as Williams faces a liquidity crunch in the wake of its inability to renew its 364-day, $2.2 billion revolver on an unsecured basis.
The company has plans to reduce debt by $3 billion over the next year, but market conditions are likely to complicate those plans. After a dividend cut caused the Williams' stock price to sink, the prospect for a new offering is unlikely. If the company is not able to raise new equity, its debt reduction efforts must come from asset sales alone.
Williams and one of its subsidiaries have $800 million in debt maturing this month and next. Moreover, due to the ratings downgrade, the company could face an additional $180 million in debt coming due and $175-600 million in margin calls. To relax liquidity constraints, the company plans to tap its $700 million revolver and complete assets sales, which could generate approximately $120 million in proceeds. Calls to Jack McCarthy, cfo, were referred to a spokeswoman, who said the company is working on its liquidity issue and expects to have it resolved this week.