Fitch Affirms Dynegy's Ratings; Assigns Ratings to New Operating Subsidiaries

Fitch Ratings has affirmed its 'CC' Issuer Default Ratings (IDR) on Dynegy Inc. (DYN) and Dynegy Holdings Inc. (DHI) following DYN's announcement that it had completed its internal corporate restructuring and closed on two new senior secured term loans.

In addition, Fitch has assigned a 'B/RR1' rating to Dynegy Midwest Generation, LLC's (CoalCo) $600 million and Dynegy Power, LLC's (GasCo) $1.1 billion term loans and assigned a 'CCC' IDR to each of the new subsidiaries. See the full list of ratings at the end of this release.

Fitch's affirmation of DYN and DHI reflects the underperformance of Dynegy's merchant generation operations and the correlation of its future financial performance to natural gas and power prices, which are expected to remain low. The affirmation of DYN and DHI continues to reflect the high probability of default or forced restructuring of DYN and DHI's unsecured obligations. The new corporate structure and term loans now limit DHI's subsidiaries' ability to upstream cash at $225 million per year, further pressuring DHI's ability to service its $3.4 billion in unsecured notes and its $589 million off-balance sheet lease obligations. As such, Fitch believes that management will pursue some sort of restructuring of existing unsecured and leasehold obligations. Operating EBITDA and cash flow at Dynegy continue to be negatively affected by relative weakness in power prices, and margin stability at the company has proven to be elusive.

In Fitch's view, with decreasing operating cash flow, Dynegy's asset valuations remain weak and current leverage would lead to weak recoveries for unsecured debtholders in case of default. The 'RR4' rating on Dynegy's unsecured notes indicates average recovery prospects in a default situation (31%-50%), due to the structural subordination to debt at CoalCo and GasCo. The 'RR6' rating on Dynegy's trust preferred notes reflect poor recovery prospects (0%-10%) given the deep subordination of the securities. Note that Fitch has removed DHI's secured issue ratings as these facilities have been retired.

The 'CCC' IDR ratings for both GasCo and CoalCo reflect the operating concerns that continue to weigh on Dynegy's generation business including the decline in hedged electricity and fuel commodity margins, weakness in earnings and cash flow, and expectations for relatively flat natural gas and power prices through 2013. GasCo and CoalCo's financial profiles remain heavily contingent upon an increase in power prices, shrinkage in the reserve capacity margins, and improvement in electricity demand in the wholesale markets where these subsidiaries own and operate their plants. While longer term Fitch expects these market factors will improve, any near- to intermediate-term improvements look to be elusive. The bankruptcy remoteness and restricted payments previsions at the new entities should alleviate some of the pressure of ongoing restructuring and possible defaults at DHI's unsecured obligations, allowing the new entities to continue to operate and service their term loans.

The 'B/RR1' ratings on the term loans are reflective of the expectations for superior recoveries on the secured term loans. Fitch valued the power generation assets that secure the term loans using a net present value (NPV) analysis. For the NPV Fitch uses plant values provided by Wood Mackenzie as an input as well as Fitch's own price deck and other assumptions. For both the GasCo and CoalCo recoveries are in the 91% to 100% 'RR1' range. The two-notch separation from the GasCo and CoalCo IDRs are reflective of the possibility of additional first lien debt which is permissible under the new facilities and the uncertainty with regard to management's ongoing restructuring plans.

Fitch has also affirmed its 'B' rating on Sithe/Independence Funding Corporation's secured bonds. Fitch continues to view the project as a distinct entity, separate from the project's owner but closely analogous to a separately secured financing of its parent company and has notched its ratings as such. As part of the restructuring Sithe is now a wholly owned subsidiary of GasCo. Management has indicated that it will be looking at the possibility of refinancing this debt with some of the proceeds of the GasCo term loan. Fitch has removed its 'RR1' rating on Sithe consistent with Global Infrastructure criteria. Fitch continues to believe recovery on the Sithe secured debt is strong.

Fitch has affirmed the following and removed the Negative Outlook:

Dynegy, Inc.

--IDR at 'CC'.

Dynegy Holdings, Inc.

--IDR at 'CC';

--Senior unsecured notes at 'CC/RR4'.

Sithe Independence Funding Corp.

--Secured bond rating at 'B'.

Dynegy Capital Trust I

--Trust preferred rating at 'C/RR6.'

Fitch has assigned the following ratings:

Dynegy Power, LLC

--IDR at 'CCC'

--Secured term loan at 'B/RR1'.

Dynegy Midwest Generation, LLC

--IDR at 'CCC'

--Secured term loan at 'B/RR1'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Research:

'Corporate Rating Methodology', Aug. 16, 2010;

'Recovery Ratings and Notching Criteria for Utilities', May 12, 2011;

'Rating North American Utilities, Power, Gas and Water Companies', Special Report, May 16, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628491

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

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