Dr. P.V. Viswanath

pviswanath@pace.edu

Dynegy Files for Unusual Bankruptcy
Nov. 8, 2011, WSJ

Dynegy Inc.'s holding company filed for Chapter 11 bankruptcy protection in a way that could cause losses for bondholders without harming parent-company shareholders that include Carl Icahn and hedge fund Seneca Capital.

The Houston power generator put the holding company, Dynegy Holdings, in U.S. Bankruptcy Court in Poughkeepsie, N.Y., Monday evening. Other Dynegy Holdings subsidiaries also filed for bankruptcy protection. Dynegy's parent company wasn't part of the filing.

Dynegy's plan to eliminate billions of dollars owed to bondholders while sparing parent company shareholders flips usual bankruptcy rules on their head. Creditors are usually paid first during bankruptcy proceedings and shareholders often are left with nothing.

But Dynegy has reorganized its corporate structure in a way that protects shareholders from a bankruptcy filing. In September, for example, it transferred assets related to coal-powered plants from Dynegy Holdings to the parent company. That left the holding company without a claim on those assets and just holding Dynegy's bond debt.

As part of the bankruptcy filing, Dynegy reached a deal with bondholders holding $1.4 billion of debt. The deal aims to eventually restructure some $4 billion in debt, exchanging existing obligations for cash and new debt, some of which would convert to 97% of Dynegy's common equity when it matures.

The company produces and sells electricity to municipalities and other energy companies, and has been struggling under a mountain of more than $6 billion in debt, lower power prices and skirmishes among shareholders that scuttled buyout offers last year.

For months, Dynegy has been jousting with hedge funds and other investors holding roughly $3.5 billion of holding-company bonds over the power producer's fate. Dynegy has been trying to get bondholders to forgive large chunks of debt, or face the prospects of bigger losses in bankruptcy proceedings.

The bondholders, meanwhile, have sued Dynegy over restructuring moves that they allege benefit shareholders at the expense of creditors. Dynegy has maintained the moves are legal and necessary.

Dynegy has an about $83 million lease payment due Tuesday tied to certain plants, which it will likely avoid making by putting its holding company in bankruptcy court.

(Also see http://dealbook.nytimes.com/2011/11/11/the-topsy-turvy-dynegy-bankruptcy/.)

Questions:

1. Prof. Steven Lubben makes this interesting point in a 2007 Law Review article:
   Credit derivatives transfer the default risk of an underlying debt instrument, without transferring legal title. These transactions have several benefits outside of bankruptcy. But once a corporate debtor enters bankruptcy - in particular, chapter 11 - it enters a bargaining process that was bottomed on a model of creditor behavior that may no longer hold because of credit derivatives. A creditor may not act like a traditional creditor if they no longer face the risk of non-payment because that risk has been hedged. In this essay I argue that credit derivatives will substantially alter chapter 11, at least with respect to large corporate debtors.
   Do you think the Dynegy bankruptcy reflects this new calculus? How?