Dynegy

(DYN)

on Friday slipped into junk credit territory, but its stock was cushioned by a market clearly braced for the fall.

After a brief dip on news of the Moody's downgrade, Dynegy's stock shot back up to recapture -- and even expand on -- its earlier gains of the day. Shares of the embattled Houston energy trader soared $1.12 to finish Friday at $7.20.

Following the lead of Fitch on Monday, Moody's withdrew its investment-grade rating for Dynegy over a myriad of concerns. The ratings agency cited as a primary worry the execution risks associated with Dynegy's plan to bolster its balance sheet by $2 billion by the end of the year. Moody's also described Dynegy's current liquidity as "considerably weaker than it has been historically."

After Moody's issued its report, however, Dynegy announced that it had secured $250 million in interim financings through a loan against a planned asset sale. Before that, Dynegy had only $720 million in cash and credit available, with a $350 million debt obligation looming in July and other cash requirements threatening to eat at its liquidity.

The company still faces challenges in renewing nearly $2 billion worth of credit facilities over the next year. In the meantime, Moody's said, Dynegy's marketing and trading business continues to suffer from a lack of counterparty and investor confidence.

But analysts agreed that Moody's downgrade -- and even much of its concerns -- had already been digested by the market.

"I think management and the Street had realized for quite some time that this was probably going to happen," said Mark Easterbrook, an analyst at RBC Capital Markets in Dallas and an owner of the stock. "The company probably already discussed the possibility with customers, who've asked for more collateral or are no longer trading with Dynegy. But I think the impact is already there."

Anne Falgoust, an analyst at Johnson Rice in New Orleans, said the next few quarters should tell the whole story.

"The company has said it has enough liquidity to collateralize its book and continue trading," said Falgoust, who owns no stock in the company. "But we'll have to wait and see what kind of impact this has on their operations and whether or not it affects their counterparties.

"That's certainly a big question right now."

Questions also linger around a key component of the restructuring plan designed to restore Dynegy's credit quality. The plan is heavily dependent on asset sales, the most crucial being Dynegy's 50-percent stake in Northern Natural Gas. Dynegy purchased its share of the asset with cash provided last year from ChevronTexaco, which is scheduled to collect $1.5 billion in preferred securities proceeds from Dynegy next year. Because of Dynegy's obligation to ChevronTexaco, Moody's believes there is a "good possibility" that Dynegy will be forced share at least some of the proceeds from the asset sale with ChevronTexaco instead of using it all to bolster its own financial health.

Still, Dynegy's relationship with ChevronTexaco remains a strength in Moody's eyes. The larger company has stepped in to offer leadership during Dynegy's recent weeks of turmoil.

"Moody's continues to consider ChevronTexaco's ownership interest, commercial relationships and board representation critical to Dynegy's ratings," the agency stated. "If those relationships weaken, additional negative ratings pressure will result."

Moody's outlook for Dynegy's credit continues to be negative.