Dynegy Stock Up on Calculated Bankruptcy

Joel Anderson  |

Shares in the company Dynegy, Inc. (DYN) soared after the company declared that Dynegy Holdings, Inc. and four of its subsidiaries have filed for chapter 11 bankruptcy. The move was a calculated one that will protect shareholders in the parent company while forcing bondholders of the nearly $4 billion in debt to take a serious haircut in bankruptcy court.

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Bankruptcy Protecting Shareholders

Dynegy, Inc. has made their plan work with the unusual move of shifting all of the company's debt to its holding company, Dynegy Holdings, Inc., and its subsidiaries. By doing so, Dynegy, Inc. itself can avoid filing for bankruptcy and bolster their stock price, pleasing shareholders, while forcing bondholders to eat the majority of the company's debt in bankruptcy court. What's more, Dynegy transferred assets related to their coal plants, their most valuable holdings, to their parent company so that they'll be protected from any claims made under Dynegy Holdings, Inc.'s bankruptcy filing. It's a move that clearly did not please bondholders as they filed a lawsuit in September alleging that Dynegy was illegally protecting certain assets from claims that could be made in bankruptcy court.  Dynegy, which saw its debts climb to $5 billion this year, has been negotiating with bondholders to take a 60 to 70 percent write down on the money the company owed, but the deal fell apart last month.

Dynegy, Inc.,  a Houston based company that makes and sells electrical energy with 17 power plants in six states, has turned the rules of bankruptcy filings on their head.  Typically, creditors would be paid back first, often leaving shareholders out to dry. In this case, though, Dynegy may have discovered a method for protecting shareholders, and the markets repaid the company by boosting the stock in early trading. Dynegy's stock  jumping over a quarter on over quadruple its average volume. The rise in price showed that Dynegy's efforts to protect their shareholders, which include Carl Icahn and hedge fund Seneca Capital, were appreciated, rebounding a stock that tumbled 10.61 percent yesterday on news of the preparations for the filing.

GenOn Also on the Move

Another Houston-based utility company also had a good day as GenOn Energy Inc. (GEN) rose over 5.5 percent. Genon is releasing their quarterly report before the market opens on Wednesday and speculation appears to be that it will be a positive one with call options on  the stock outnumbering puts by over 25:1. Elsewhere in the utilities sector, Calpine Corporation (CPN) was up over 2.5 percent and China's Huaneng Power International, Inc. (HNP) jumped nearly 8 percent while UGI Corp. (UGI) took a hit on its worse-than-expected Q4 report that showed an after-tax loss for the quarter, dropping nearly 2.75 percent.

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