Aug. 12, 2009 (Business Wire) -- Fitch Ratings has downgraded the following ratings of Dynegy Inc. (Dynegy), Dynegy Holdings Inc. (DHI) and Sithe/Independence Funding Corp. as follows:

Dynegy Inc.

--Issuer Default Rating (IDR) to 'B-' from 'B'.

Dynegy Holdings, Inc.

--IDR to 'B-' from 'B';

--Secured bank facilities to 'BB-/RR1' from 'BB/RR1';

--Second priority notes to 'BB-/RR1' from 'BB/RR1';

--Senior unsecured to 'B/RR3' from 'B+/RR3'.

Dynegy Capital Trust I

--Trust preferred to 'CCC/RR6' from 'CCC+/RR6'.

Sithe Independence Funding Corp.

--Secured bonds to 'BB-' from 'BB'.

Fitch revised the Rating Outlook to Negative from Stable.

The rating action recognizes the underperformance of Dynegy's merchant generation operations and the correlation of its future financial performance to the level of natural gas and power prices, which are expected to remain volatile. Operating EBITDA and cash flow at Dynegy continues to be negatively affected by the declines in power prices, and margin stability at the company has proven to be elusive. Fitch believes that Dynegy has taken steps to increase the stability of its earnings and cash flow in 2009 and 2010 by contracting for 95% and 90% of its expected volumetric output, respectively, however, credit metrics nevertheless are forecasted to remain weak and are more appropriate to the lower ratings level.

The credit profile benefits from Dynegy's strong liquidity position and strong asset values as well as its intention to pay down some of its nearer term maturities with proceeds from its recent transaction. Dynegy had $1.87 billion in available liquidity as of Aug. 3, 2009 consisting of $715 million in cash and $1,158 million in available credit lines. DYN's liquidity is projected to be strong, however, continued weakness in power prices, volatility in the price of natural gas, tightness in capital markets, and with Dynegy's capital spending plans could all pressure liquidity needs. Fitch notes that the announced transaction with LS Power is generally a credit positive as it further supports the liquidity position and will allow Dynegy to push out some of its maturities alleviating some refinancing risk. Additionally, the recently announced credit facility amendments should give Dynegy some needed covenant flexibility.

Fitch notes that for Dynegy, asset valuations are strong relative to outstanding indebtedness. Consequently, while margin pressure may continue to hamper credit metrics, strong asset valuations would lead to strong recoveries across the capital structure in case of default. Fitch assigns Recovery Ratings (RRs) to issuers with IDRs in the 'B' category or below.