North America High-Yield Bond: Dynegy's US$5.1bn triple-tranche bond

IFR Review of the Year 2014
3 min read
Natalie Harrison

Dynegy’s high-yield acquisition bond had it all: a huge US$6.35bn underwriting commitment that took nerve from banks, an innovative structure that ensured the company could pay for two major acquisitions and a tremendous execution in a tough market.

The US$5.1bn trade was the largest domestic dollar high-yield deal of the year. And with proceeds used to help finance the US$2.8bn purchase of Duke’s non-regulated Midwest business and the US$3.45bn acquisition of EquiPower from Energy Capital Partners, it was a game-changer for the company.

“These two acquisitions will double Dynegy’s generation capacity, more than triple adjusted Ebitda and quadruple free cashflow,” said CFO Clint Freeland.

Lead-left Morgan Stanley was key to the financing, which also included mandatory convertible preferred stock and common stock issues. The bank provided a larger commitment than the other four bookrunners – Barclays, Credit Suisse, RBC and UBS – and also drove the complex structuring that placed proceeds into two separate escrow accounts.

The structure effectively allows for every possible outcome on the M&A front: if either deal is not approved, the bonds will be repaid to investors. If both go ahead, the escrows collapse, and Dynegy becomes the single new issuer of the bonds.

“Each seller knew they would get their money, and Dynegy knew that it could finance centrally and altogether,” said Dan Toscano, head of global leveraged and acquisition finance at Morgan Stanley. “It was brilliant technology.”

The unsecured format gave Dynegy more flexibility to use secured debt in future for liquidity and hedging, which in turn means more certainty around future earnings.

Dynegy and the leads rightly won kudos for braving the market when they did. At launch in October, global economic growth concerns and plunging oil prices were wreaking havoc in the markets.

But the Single B rated issuer defied the odds to pull off what was widely viewed in the circumstances as a spectacular trade. It priced a US$2.1bn five-year bond tranche at 6.750%, a US$1.75bn eight-year at 7.375%, and a US$1.25bn 10-year at 7.625% – just 25bp back from whispers. All three were bid four to five points above their par pricing weeks later.

The bond offering was more than twice subscribed, with size skewed to the five-year, which offered the lower cost of capital.

The 7.25% average coupon was 75bp higher than the company had hoped for in August. But the trade took a lot of risk off the table, and will allow Dynegy to concentrate on integration as soon as it gets the nod from regulators.

“It was a risk management decision for us,” said Freeland.

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North America High-Yield Bond 2014