by Alex Plough, Madalina Iacob, and Alexander Gladstone
A group of Illinois Power Generating (IPG) bondholders have hired Houlihan Lokey as they negotiate with parent company Dynegy over the terms of a potential distressed debt exchange, according to two sources familiar with the matter. The consortium has also engaged Willkie Farr as legal advisor, they added.
The crux of the recent activity is Dynegy’s attempt to simplify its capital structure by folding in the currently ring-fenced IPG via an exchange offer, according to one of the sources.
However, talks have stumbled over the valuation of IPG’s assets, which consist of coal-fired power plants acquired from Ameren Corp in 2013, as well as over the pricing and structure of the proposed exchange, the two sources said.
“The question is coming to the right valuation … there is a light at the end of the tunnel but it’s difficult to say when this will be resolved,” one of the sources said.
IPG’s three tranches of unsecured bonds trade at deeply distressed levels. Its nearest dated maturity, a CCC+/Caa3 USD 300m 7% senior unsecured note due 2018 last changed hands on 3 June at 41.5, according to MarketAxess.
Some bondholders say that Dynegy has operated the plants effectively, and so would be able to extract the most synergies from the assets. Still, other holders are evaluating whether they could capture more upside by pushing the issuer into Chapter 11 proceedings to acquire the assets and then sell them to another operator, one source added.
“There may be a restructuring rather than a distressed exchange,” one of the sources said.
IPG has struggled in the face of weak commodity and power prices, among other headwinds facing the coal-fired power sector, according to a 14 June Standard & Poor’s ratings report. The agency lowered the issuer’s outlook to negative from stable, citing weaker valuations for coal-fired assets and its expectation that refinancing the USD 300m 2018 bond maturity will be difficult to achieve at favorable terms. S&P also flagged liquidity as an issue and pegged cash on hand at USD 55m as of 31 March.
Dynegy created the IPG subsidiary in March 2013 when it acquired a 2,895 MW portfolio of coal fired plants from Ameren Corp, housed at Ameren Genco, while keeping USD 825m in debt then at Genco ringed-fenced and non-recourse to Dynegy, with the exception of a USD 25m guarantee.
At that time, the Genco bonds were trading in the mid-50s, under pressure from the parent’s decision to ease off support for the merchant generation business due to low natural gas prices and a hefty environmental capital expenditure tab. Dynegy paid no cash for the transaction since much of the value to the seller came from transferring the Genco subsidiary’s outsized liabilities to the buyer.
Both Dynegy and IPG rely on significant synergies arising from IPG’s retail business and other assets in the Midwest part of the Midcontinent Independent System Operator (MISO) regional transmission organization. Like its peers in other parts of the country, MISO runs a capacity auction every year which compensates power generators for their pledge to provide capacity in case of shortages.
“Dynegy and IPG can together appropriately retire or invest in MISO market-wide assets to suit market price signals. [..] Both sides have much to gain so [there is] optimism a deal will be done,” claimed one of the sources.
As the MISO market is undergoing a reform process to better compensate generators in the region, recent asset retirements from IPG, Dynegy and even Exelon’s Clinton nuclear plant shutdown are expected to pressure power supply and push capacity prices up, the source noted.
Besides the USD 300m unsecured notes, IPG also has a USD 250m 6.3% senior unsecured note due 2020 that last traded on 1 July at 40, as well as a USD 275m 7.95% senior unsecured note due 2032 that changed hands on 28 April at 43.25.
When reached for comment, Dynegy spokesperson Micah Hirschfield said that “the information Debtwire provided to Dynegy for our comment is not accurate,” but did not provide further information. Houlihan Lokey and Willkie Farr did not respond to requests for comment.