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November 8, 2011 8:16 PM

Sidley Austin, White & Case Take Lead on Unusual Dynegy Bankruptcy

Posted by Brian Baxter

As of Tuesday, a series of unusual Chapter 11 filings by subsidiaries of Houston-based energy company Dynegy Inc., appeared to be having the intended effect—at least in the short-term—of protecting the parent entity's shareholders while reducing $4 billion in debt due to bondholders.

In a typical Chapter 11 case, bondholders are among the first to be repaid through asset sales or cash investments, while shareholders must wait at the back of the line. Dynegy is attempting to flip that formula on its head by having its Dynegy Holdings unit and several other subsidiaries seek Chapter 11 protection. (Indeed, some news accounts labeled the move an "upside-down bankruptcy.")

The parent company's plan—to use the bankruptcy process to cut debt and shed leases on several power plants—was well received by the market, initially at least, as Dynegy shares soared in trading Tuesday. How the gambit plays out in the long term remains to be seen. Stephen Lubben, a Seton Hall Law School bankruptcy professor and columnist for The New York Times's DealBook, suggests that the company's rather unique restructuring plan figures to face stiff opposition in bankruptcy court.

The Chapter 11 filings—made late Monday in bankruptcy court in Poughkeepsise, New York (one of the units in question operates the Danskammer Generating Station in nearby Newburgh)—follow a September reorganization of Dynegy's corporate structure that saw assets linked to coal-fired power plants transferred from Dynegy Holdings to the parent company. The Wall Street Journal reports that the move left the holding company without a claim to those assets and holding only Dynegy bond debt.

Over the past few months, Dynegy has sought to reach agreements with bondholders. In conjunction with its subsidiaries' Chapter 11 filings, Dynegy announced a deal with bondholders holding $1.4 billion in debt.

White & Case financial restructuring and insolvency partner Gerard Uzzi and other lawyers from the firm are serving as special litigation counsel to Dynegy, according to court filings by the firm. White & Case has previously advised Dynegy on the development and project financing for various power facilities.

Sidley Austin corporate reorganization and bankruptcy group cochair James Conlan, and bankruptcy partners Jeffrey Bjork, Paul Caruso, and Matthew Clemente are serving as lead bankruptcy counsel to Dynegy. Neither Sidley nor White & Case has yet filed billing statements with the bankruptcy court.

Dynegy's bottom line has taken a beating in recent months thanks to a combination of rising costs and falling prices for the electricity the company sells to power grids around the country. Two years ago, the company tapped Akin Gump Strauss Hauer & Feld for outside counsel on the sale of nine power plants to one of its major shareholders, LS Power Associates.

Paul, Weiss, Rifkind, Wharton & Garrison corporate reorganization partner Andrew Rosenberg is advising an ad hoc committee of bondholders, according to bankruptcy court records. Jenner & Block chairman Anton Valukas, litigation cochair David Bradford, and litigation partner Stephen Ascher are representing Newark-based PSEG, a publicly owned gas and electric utility in New Jersey that sued Dynegy over the summer to prevent the transfer of certain assets.

One of Dynegy's largest shareholders is renowned corporate raider Carl Icahn, who unsuccessfully sought to acquire the company in a $665 million deal last December. That transaction fell through the following February, leading to the resignation of several top Dynegy executives, including former general counsel J. Kevin Blodgett, after the company failed to sell itself for a second time.

Dynegy's new general counsel is Catherine Callaway, who took over as the company's top in-house lawyer in September. Dynegy's other top legal chief is Kent Stephenson, a deputy general counsel who succeeded Blodgett when he stepped down earlier this year.

Dynegy lists assets of nearly $13.8 billion against potential liabilities of almost $6.2 billion in the bankruptcy filings of its subsidiaries.

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