Dynegy Bankruptcy Filing

Regarding the recent mega filing, Dynegy, here is a commentary which I found interesting.  Of course, this humble author does not agree or disagree with the contents hereof.

“Next, the second-level holding company — the one that filed for Chapter 11 — converted from a Delaware corporation to a Delaware L.L.C. I have not seen any explanation for this move from Dynegy, but one has to suspect it was designed to exploit the Delaware Supreme Court’s recent opinion that held that creditors of a limited liability company could not bring an action to enforce managers’ (directors’) fiduciary duties.

An interesting point is whether the conversion to an L.L.C. could itself be attacked as a fraudulent transfer designed to hinder, delay or defraud creditors.

Finally, and most audaciously, the ultimate parent company became the direct owner of the natural gas group. Formally, this involved a multistep sale process, but when the dust settled the ultimate parent owned the coal group and the debtor holding company (the L.L.C.) had itself an unsecured note alleged to be worth $1.25 billion. That valuation turned on some rather aggressive present-value calculations.

What is most interesting, Dynegy Inc. can either meet its obligations to the L.L.C. holding company in cash or in forgiven debt of the intermediate L.L.C. parent. This gives the ultimate parent some rather perverse incentives that are not unlike those I long ago identified with regard to buyers of credit-default swap protection.

Here is a link to the entire article which I do recommend reading: http://dealbook.nytimes.com/2011/11/08/whats-behind-dynegys-unusual-bankruptcy/

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