Moody's cuts Dynegy note to Ba2, rates loans Ba1

Moody's Investors Service said it assigned Ba1 (LGD1, 9%) ratings to Dynegy Holdings Inc.'s new $750 million senior secured revolving credit facility and $500 million senior secured synthetic letter-of-credit facility and downgraded the 9 7/8% second-priority senior secured notes due 2010 to Ba2 (LGD2, 21%) from Ba1 (LGD2, 19%).

The agency also affirmed the corporate family rating at B1, Dynegy Holdings' senior unsecured notes at B2 (LGD4), NGC Corp. Capital Trust I's subordinated capital income securities (SKIS) due 2027 at B3 (LGD6, 96%) and the pass-through certificates of Dynegy Danskammer, LLC and Dynegy Roseton, LLC at Ba3 (LGD3), but changed the loss-given-default rate assigned to the senior secured notes to 63% from 61% and the loss-given-default rate assigned to the pass-through certificates to 36% from 35%.

The outlook remains stable.

A $275 million draw on the new revolver will be used to help finance Dynegy's pending merger with several affiliates of the LS Power Group, and the synthetic letter-of-credit facility will be used to issue letters of credit to support the obligations of Dynegy and the LS Power entities with which it is merging.

Moody's previously affirmed Dynegy's ratings following the initial announcement of the merger plans. However, the company now intends to use its own letter-of-credit facility to support the LS Power entities' obligations instead of a standalone letter of credit facility as previously proposed, and it plans to immediately refinance the Dynegy, Inc. junior subordinated debentures that are to be issued to the LS Power Group at financial close with a draw on its revolving credit facility. As a result, Dynegy Holdings will have more direct exposure to the LS Power entities than was originally contemplated, although Moody's said this is offset somewhat by the plan to integrate the LS Power entities as subsidiaries of Dynegy Holdings rather than Dynegy, Inc.

The agency said it does not believe that, in and of themselves, the revisions to the transaction structure have a significant impact on the credit of any of the affected entities. The downgrade of the second-lien secured notes reflects their expected increased subordination resulting from the proposed draw on the first-lien revolving credit facility. The loss-given-default assessment of the notes remains stable at LGD2, but Moody's said the increase in the loss-given-default rate to 21% from 19% was sufficient to drive the rating of the second-lien notes downward.

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