By Joseph Checkler Dynegy Holdings LLC says a dissident group of junior creditors has agreed to drop their opposition to the power provider's restructuring proposal, a day ahead of a key hearing on the plan. In a Wednesday filing with the U.S. Bankruptcy Court in Poughkeepsie, N.Y., Dynegy said a group of subordinated noteholders who say they're owed more than $220 million will be able to claim $55 million, and two hedge funds that hold those notes will get their legal fees paid by Dynegy's estate. That's about what they would have gotten under Dynegy's original proposal last year, but it gives them a bit worse treatment than a second one presented later. Dynegy's third proposal to exit bankruptcy, made after a court-appointed examiner helped broker a deal between the company and more senior creditors, hadn't defined recoveries for the subordinated noteholders. Hedge-fund managers Claren Road Asset Management and CQS, two holders of those notes, have now dropped their opposition to the proposal and their motion for a Chapter 11 trustee to be appointed to take over the case. Under a previous plan, presented before examiner Susheel Kirpalani's March report denounced Dynegy's transfer of coal assets before its bankruptcy proceedings to parent Dynegy Inc. (DYN), the subordinated noteholders would have received about 35 cents on the dollar for their claim. That was up from 25 cents under a prior plan introduced last year. The new settlement is closer to the 25 cents, a reflection of the changes that were ordered after Kirpalani's report to benefit holders whose bonds were backed by the coal leases. Kirpalani's report, which called the coal-asset transfer a breach of fiduciary duty by the company's board of directors, threw Dynegy's already contentious case into more disarray. But after a judge ordered mediation sessions with Kirpalani himself, the company in April disclosed a deal with most objecting groups to shift the coal assets back to creditors. The part of the settlement not pertaining to unsecured creditors will remain the same. The entire deal still needs to be approved by Judge Cecilia G. Morris at a hearing Friday and later must be voted on by creditors. It includes a deal with a unit of U.S. Bancorp (USB), the representative of holders of bonds secured by leases of two Dynegy's power plants. U.S. Bank had previously sued over the asset transfers but has agreed to drop the lawsuit in exchange for a $540 million claim plus as much as $31 million more if the two plants, called Roseton and Danskammer, are sold. In all, the holding company's unsecured creditors will get a 99% stake in the parent company. Current Dynegy Inc. shareholders initially would receive 1%, plus warrants to potentially boost their stake to 13.5% over five years. Dynegy Holdings filed for Chapter 11 protection in November to restructure billions of dollars in debt in bankruptcy court and get out of two burdensome power-plant leases. The transfer of the coal-powered plants from Dynegy Holdings to Dynegy Inc. in September left the subsidiary's bondholders owed roughly $4 billion without a claim on those plant assets. Dynegy Inc. then put Dynegy Holdings and related subsidiaries in bankruptcy, a move that hurt bondholders without affecting the parent's shareholders, leading to the examiner being appointed. Those shareholders include Carl Icahn, with two seats on the company's board. (Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com) -By Joseph Checkler, firstname.lastname@example.org. Twitter @JoeCheckler --Patrick Fitzgerald in Washington contributed to this article.