Dynegy bank debt swooned from par to 85 last Tuesday shortly after its debt was downgraded. By week's end some traders said bids had edged back up to the high 80s, but players were taken aback by the initial drop. "[Fifteen points] is a pretty big hit," a dealer said, noting the credit had consistently been a par name. Moody's Investors Service notched the debt down to Baa3 from Baa2 because of concerns over power sector pricing pressures, and Dynegy's legal tussle with Enron following the failed takeover.
The size of reported trades could not be determined, but dealers believe the credit was sold off by an original holder. Goldman Sachs was reportedly involved, but officials there declined to comment. Calls to Robert Doty Jr., cfo of Dynegy, were referred to the financial department. Spokesman Steve Stengel referred questions to recent press releases.
While a number of dealers said two trades took place, even though the size was small, one dealer was skeptical, calling it a fake post by dealers talking the paper down in an attempt to snag it. "Everyone's talking about these trades, but no one's saying they were involved" said another skeptical dealer.
Last Thursday in a Moody's conference call, analyst John Cassidy said the major reasons for the downgrade include the high leverage and instability of cash flow for the company. "Earnings and cash flow are difficult to predict," he said, citing the volatility of the energy sector currently. "A more conservative capital structure is warranted." He said the credit is being reviewed for further downgrade due to litigation with Enron.
Enron filed a lawsuit against Dynegy on Dec. 2 for backing out of the proposed merger. The separate parties are now fighting over assets that had been offered while the deal was still on. "Dynegy put a cash infusion into Enron and got the Northern Pipeline as collateral," a trader explained. "Then Enron filed and the deal fell apart. Enron basically said, 'You tanked us. Now we're not giving you our crown jewel [Northern Pipeline].'"
Calls to Jeffrey McMahon, cfo of Enron, were referred to spokeswoman Karen Denne. Dynegy backing out of the proposed acquisition forced Enron into bankruptcy, said Denne. "Dynegy didn't have grounds to walk away from the merger, and now they have no claim on our [Northern Natural Gas] pipeline," she added. Denne maintains that Enron disclosed all financial information to Dynegy before Enron issued its 10Q. The case is still in the courts and no decision date has been released.