A subsidiary of Houston-based power company Dynegy Inc. is preparing to file for Chapter 11 bankruptcy protection as early as Monday evening, according to published reports.
The filing by the subsidiary, Dynegy Holdings, would protect shareholders of the parent company, including billionaire investor Carl Icahn, according to reports by The Wall Street Journal and others. The filing was not certain and a new deal with bondholders was still possible, the reports said.
The potential move follows Dynegy's decision last week not to extend its offer to exchange up to $1.25 billion in bonds for a mixture of cash and new bonds after receiving a tepid response from bondholders. The offer, first made in September, would have resulted in bondholders losing 60 percent to 72 percent of the principal they were owed, according to Kim Noland, an analyst with bond research firm Gimme Credit. The exchange offer was for outstanding bonds that had a combined principal value of around $3.6 billion.
A push toward a bankruptcy filing puts bondholders' "feet to the fire" to accept debt waivers or have their claims tied up in bankruptcy court for years without the certainty of recouping anything, Noland said.
"They want to force bondholders into a principal haircut," she said.
Dynegy didn't immediately return a message seeking comment.
Dynegy, which sells electricity to grids and utilities in the Midwest, the Northeast and the West, has been hurt by lower power prices over the last two years. In April, the company hired financial advisers to help it restructure its debt and to try to sell assets to avoid a bankruptcy filing. The company has more than $5 billion in debt.
Instead of selling assets, the company was restructured so that power generation assets were held at the parent company level, but the bonds were issued by the subsidiary.
Bondholders protested the move, claiming that it stripped the collateral from their bonds. In September, a group of bondholders sued the company in the Supreme Court of the state of New York alleging that the company illegally protected some assets from claims they could make in bankruptcy court.
Bondholders Avenue Capital Group and Oaktree Capital had no comment.
Investors Franklin Templeton, Caspian Capital and Carl Icahn didn't immediately return messages seeking comment.
Last week, Dynegy Holdings elected not to make a $43.8 million interest payment on some of its outstanding debt. The company also faces making a payment of more than $80 million on Tuesday for one of its power plant leases, Noland said.
Dynegy shares fell 6 cents, or 2 percent, to $2.89 in after-hours trading Monday after falling 35 cents, or 10.6 percent, to close at $2.95 in regular trading.