By Joseph Checkler
Of DOW JONES DAILY BANKRUPTCY REVIEW
A judge on Friday approved a settlement between Dynegy Holdings
LLC and landlord Public Service Enterprise Group Inc. (PEG) that
will allow the power provider to reject its money-losing leases at
two upstate New York power plants.
Judge Cecelia B. Morris's approval of the deal helps Dynegy move
forward with its restructuring, despite several unresolved gripes
from other creditors.
The settlement allows PSEG a $110 million unsecured claim plus
$7.5 million in cash in return for it withdrawing its request for
Dynegy's bankruptcy case to be dismissed. The scheduled date for
the rejection of the leases is Dec. 30, meaning parties will get a
chance to object to some aspects of the settlement before that.
At a hearing Friday in the U.S. Bankruptcy Court in
Poughkeepsie, N.Y., Cadwalader, Wickersham & Taft LLP's George
A. Davis, a lawyer for bondholder trustee U.S. Bank, said the
settlement has "fatal flaws" that he would elaborate on in court
papers later this month. The lease rejection could sharply reduce
the amount of money bondholders represented by Davis can claim,
since those bonds are tied to the leases. Creditors will get a
chance to object to terms of the settlement at a Dec. 28
hearing.
Morris also said Dynegy could keep borrowing on its $15 million
bankruptcy loan from another Dynegy-owned entity.
After those approvals, the judge called a 45-minute recess so
Dynegy could negotiate with creditors clamoring for an independent
examiner to look into the power company's unusual corporate
reshuffling on the eve of its bankruptcy filing.
A group of bondholders led by U.S. Bank is asking Morris to
approve the appointment of an examiner who could look into whether
Dynegy Holdings improperly transferred assets to its parent
company, Dynegy Inc. (DYN), before the Chapter 11 filing to keep
them out of the reach of creditors. Hedge-fund manager David
Tepper's Appaloosa Management LP is also calling for an
examiner.
Lawyers for Dynegy Inc., which isn't in bankruptcy, have said
the request for an examiner is "premature" and creditors' "latest
litigation tactic designed to waste time and money." The examiner
request will be argued in court this afternoon if no settlement is
reached.
In September, Dynegy affiliates moved assets related to its
parent company out of the reach of the holding company's creditors,
capping a series of transactions that reshuffled its structure and
location of assets.
PSEG and the bondholders sued Dynegy in state court seeking to
claw back the company's valuable coal interests that were
transferred in the corporate reshuffling. They claim the transfers
were designed to shield shareholders--including a fund controlled
by Carl Icahn--from a bankruptcy at the expense of bondholders. As
part of the lease settlement, PSEG has agreed to drop its state
lawsuit.
PSEG affiliates bought Dynegy's Roseton and Danskammer plants,
both located in Newburgh, N.Y., about 70 miles north of New York
City, for $920 million in 2001 and leased them back to the company,
according to court papers.
The deal was financed with $800 million in debt, safeguarded by
guarantees and tax indemnities. Those protections are being erased
in the transfers that removed more than $1 billion worth of value
from the reach of creditors, bondholders have alleged.
Last month, Dynegy Holdings and four subsidiaries filed for
bankruptcy after senior bondholders, owed more than $1.4 billion,
signed off on a restructuring deal.
The restructuring deal calls for the bondholders to trade in $4
billion in unsecured debt for $400 million in cash, $1 billion in
new secured notes and $2.1 billion in convertible notes. In return,
Dynegy must be out of bankruptcy by next August.
(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
--Patrick Fitzgerald contributed to this article.