Dynegy Holdings: Ongoing Family Saga Destroys Equity

 | Mar 20, 2012 12:51AM ET

By:Christopher Faille

Hedge funds that pursue distressed debt strategies have good reason to follow the ongoing saga of Dynegy Inc. and its corporate family, where a control group of shareholders attempted a corporate restructuring last summer that retained valuable assets under the control of the parent corporation, while leaving the family’s liabilities within a subsidiary, 548(a)(1)(B) of the Bankruptcy Code, the transfer of an interest in property is constructively fraudulent and thus avoidable if the debtor (Dynegy Holdings) was insolvent at the time of the transaction and received “less than a reasonably equivalent value” for the transfer.

The 2011 restructuring came about only after Dynegy Inc. had twice failed to arrange a merger. In August 2010 it entered into a merger agreement with an affiliate of Blackstone (Denali), but in November Dynegy shareholders voted to reject the Blackstone/Denali offer. Then in December, it reached an agreement with Icahn Enterprises. But that failed because an insufficient number of shares were tendered when the offer expired in 2011.

After that second merger effort failed, the equity value of Dynegy flat-lined, although the iShares Dow Jones US Utilities Sector enjoyed a surge beginning that March and continuing well into May. See the green and blue lines, respective, of the chart below.