Bondholders Sock It to Struggling Dynegy

MANHATTAN (CN) - Bondholders sued distressed energy producer Dynegy, seeking to undo a restructuring they claim removed Dynegy's coal assets "from the reach of its public creditor bondholders and transfer[red] them to the public equity holders," with the "sole, unabashed, and illicit purpose" of defrauding public creditors.

Lead plaintiff Shirlee Schwartz sued Dynegy, its subsidiaries Dynegy Holdings and Dynegy Gas Investments, and three Dynegy executives who also head Dynegy Holdings' board of managers: CFO Clint Freeland, COO Kevin Howell and CEO Robert Flexon, in Federal Court.

Dynegy Holdings, which filed for bankruptcy in November, is not named as a defendant. The company was converted into a new entity, Dynegy Holdings LLC, according to the complaint.

Schwartz says Dynegy and its subsidiaries have lost hundreds of millions of dollars in the past two years due to depressed power prices nationwide. She claims the losses caused Dynegy's substantial indebtedness and decreased the value of Dynegy Holdings' publicly traded bonds.

"Defendants are distressed companies (and their senior management) in the energy business, principally the generation, marketing and sale of electricity through coal-powered and gas-powered facilities," the complaint states. "Until the events at issue here, the only material asset of the publicly traded parent company was ownership of an operating subsidiary in which the coal and gas assets resided. Dynegy Holdings, Inc. (now known as Dynegy Holdings, LLC) borrowed money from the public markets through the issuance of approximately $3.6 billion in notes with varying interest rates and maturities dates ranging from 2012 to 2027. Plaintiff is the holder of these notes. In a series of recent self-dealing transactions, the parent company has restructured itself to remove the coal assets from the reach of its public creditor bondholders and transfer them to the public equity holders. The sole, unabashed, and illicit purpose of these self-dealing transactions is to hinder, delay, and defraud its public creditors for the benefit of its equity holders. Simply put, despite the parent company's repeated and unambiguous calls of distress and gloomy outlooks, the company has pilfered one of the most valuable assets of the operating subsidiary that issued the notes, and removed it from the reach of creditors, for no reason other than to benefit the parent's equity holders, prominent among them Carl C. Icahn." (Parentheses in complaint).

Shareholders suedDynegy and Icahn in March over the alleged fraudulent acquisition of its indirectly owned subsidiary, Coal Holdco.

Faced with a deteriorating financial situation and projected negative cash flow, Dynegy Holdings chose to transfer its assets to the parent company, Dynegy, in "a plan to enrich shareholders at the expense of noteholders," according to the new complaint.

Schwartz says the restructuring plan came after a failed merger with The Blackstone Group in 2010.

"If not a fraudulent conveyance, the transfers constitute an illegal dividend from a subsidiary to a parent company, for which the directors of the transferor company are liable," the complaint states.

A report from Dynegy Holdings' bankruptcy examiner concluded that the transaction was "an actual fraudulent transfer" and a breach of fiduciary duty by Dynegy Holdings' directors, according to the complaint.

Schwartz says the transfer of assets for insufficient consideration left Dynegy insolvent. She says the plan was designed to deprive Dynegy Holdings of cash to service its own debt and to force bondholders to sell back its bond debt at a hefty discount.

A bulletin issued by Standard & Poor's rating services in September 2011 noted that "given this level of proposed repayment and the precarious financial condition of Dynegy, the exchange is coercive and tantamount to default in our view," according to the complaint.

The new notes being offered in the exchange are a fraction of the amount of the original notes.

Schwartz seeks class certification, repayment of the allegedly unlawful distribution, damages for breach of fiduciary duty, and wants the fraudulent transfer annulled.

She is represented by Lee Squitieri with Squitieri & Fearon.

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