UPDATE: Dynegy, Key Creditors Ink Preliminary Bankruptcy Deal

Dynegy Holdings LLC said Wednesday that it has reached an agreement in principle with nearly all its creditor groups on a debt-restructuring plan, less than a month after an independent examiner's denunciation of the power provider's pre-Chapter 11 asset shuffles sent the case careening toward possible calamity.

The proposal would reshift Dynegy's coal assets, which were transferred to shareholders of its parent, Dynegy Inc. (DYN), before the bankruptcy filing, back to creditors, meaning public stockholders of Dynegy's parent would likely be all but wiped out.

Under the preliminary pact, the holding company's unsecured creditors would get a 99% stake in the parent company. Current shareholders initially would receive 1%, plus warrants to potentially boost the stake to 13.5% over five years.

Dynegy said the settlement includes a key deal with U.S. Bank, the representative of holders of bonds secured by leases of Dynegy's power plants that had sued over the asset transfers.

Under the terms of that part of the settlement, creditors with those bonds will receive half of the proceeds from the sale of the plants, with a cap on their total recovery set at $571 million. While it's unlikely the plants would sell for enough to hit that maximum value, Dynegy's previous plan would have given them much less.

Holders of subordinated notes, owed about $216 million, are the one main group that still hasn't agreed to the settlement.

Judge Cecilia G. Morris must still approve the new plan, which hasn't yet been filed with the court. Creditors will also have to vote on the changes.

Court-appointed examiner Susheel Kirpalani, whom Morris charged with mediating negotiations between Dynegy and creditors, said in court Wednesday that the case is still filled with uncertainty.

"The important thing to bear in mind here is nobody's raising a flag of victory," he said. Kirpalani broached the topic of a motion by the U.S. Trustee Office, the Justice Department's bankruptcy watchdog, for a Chapter 11 trustee to be appointed to oversee Dynegy's bankruptcy case. Two hedge funds support the U.S. trustee's effort, which Morris said will be heard on May 2 in the U.S. Bankruptcy Court in Poughkeepsie, N.Y.

In his report released last month, Kirpalani concluded that Dynegy's board of directors breached its fiduciary duty when it transferred coal assets to the parent company before Dynegy Holdings' bankruptcy filing, calling the shuffling a "fraudulent transfer" that shielded shareholders from losses but hurt other creditors.

Kirpalani said that, while some members of the parent company's board "did not even understand" the transfer of coal assets that essentially shielded shareholders from losses at the expense of other creditors, others--including a representative from top shareholder Carl Icahn's investment fund--did.

In court Wednesday, White & Case's Thomas E. Lauria, a lawyer for Dynegy Inc., said the settlement didn't represent an admission that any of the asset shuffles were "fraudulent." "To the contrary," Lauria said, the settlement showed a "continued commitment to doing the right thing."

Dynegy Holdings and its creditors had been sparring since Dynegy affiliates moved the assets out of the reach of the holding company's creditors in September, capping a series of transactions that reshuffled its structure and location of assets.

The U.S. Bank group sued Dynegy in state court, alleging that the asset shift last year was designed to shield Icahn and other shareholders from the effects of a bankruptcy filing. That lawsuit will now be withdrawn.

Kirpalani's findings threw into disarray Dynegy's bankruptcy exit proposal, one that called for unsecured noteholders owed about $4 billion to share $400 million in cash, $2.1 billion in new convertible preferred stock and $1.015 billion in new senior notes.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)

-By Joseph Checkler; Dow Jones Newswires; 212-416-2152; joseph.checkler@dowjones.com

-Tess Stynes contributed to this article.

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