Bloomberg News

Energy Future Credit Swaps Fall After IRS Sees No Tax Liability

April 04, 2013

Credit-default swaps tied to the debt of Energy Future Holdings Corp. dropped after the U.S. Internal Revenue Service said the Texas power company won’t have to pay a potential tax liability on $23 billion when transferring ownership of some of its units.

Five-year contracts linked to Energy Future fell 6.5 percentage points to 23 percent upfront at 4:30 p.m. in New York, according to CMA, the data provider owned by McGraw-Hill Cos. that compiles prices quoted by dealers. That implies a 75.1 percent probability the company will fail to meet its obligations before the swaps expire June 2018, down from 83.2 percent yesterday, CMA data show.

The decision means Energy Future, taken private six years ago in the largest leveraged buyout, can dispose of its shares in its Energy Future Competitive Holdings Co. unit without triggering the tax liability, the Dallas-based company said in a regulatory filing yesterday.

The tax disclosure is unrelated to Energy Future’s program to manage its debt, Allan Koenig, a spokesman for Energy Future, said in a telephone interview. The company’s proposed transfer of shares in its competitive unit to a newly created subsidiary will have no effect on its operations or financial statements, according to the filing.

Analysts at high-yield debt research firm KDP Investment Advisors Inc. had said in a Nov. 1 note that the power firm may face a tax liability if it places its Texas Competitive unit into bankruptcy.

Splitting Contracts

Contracts tied to Energy Future Intermediate Holding Finance Inc., which were created after the committee of banks and investors that governs credit swaps ruled that a debt exchange at Energy Future triggered a split of contracts tied to the parent, were little changed at a mid-price of 14 percent upfront, according to three people familiar with the trading who asked not to be identified.

The International Swaps & Derivatives Association’s determinations committee ruled March 19 that the debt exchange caused the so-called succession event, splitting swaps on the parent between it and its Energy Future Intermediate Holding Co. and EFIH Finance units, according to the New York-based industry group’s website.

A gauge of U.S. corporate credit risk declined as central banks in Japan and Europe reassured investors that they will keep economies awash in cash to bolster growth.

Japan Stimulus

The Markit CDX North American Investment Grade Index, a credit-swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, fell 1.3 basis points to a mid-price of 88 basis points, according to prices compiled by Bloomberg.

Credit-swaps typically fall as investor confidence improves and rise as it deteriorates. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The Bank of Japan boosted its bond-buying program to help support the world’s third-largest economy, buying longer-term government bonds as part of its asset-purchase program, while European Central Bank President Mario Draghi said policy will remain accommodative after keeping the benchmark rate at 0.75 percent. U.S. data showed jobless claims increased last week, a day before the Labor Department’s monthly payrolls report.

Risk-averse investors are turning to the corporate-debt market as they wait “to see if the smoke has cleared,” said Robert Smalley, a credit strategist at UBS Securities LLC in New York.

‘Halfway House’

“Corporate credit can be a halfway house,” he said in a telephone interview. “If you don’t have conviction about equities or about Treasuries, you tend to see corporate credit as a good place to be.”

The labor report tomorrow will probably show a gain of 190,000 in U.S. payrolls last month, following a 236,000 advance in February, according to economists surveyed by Bloomberg. The unemployment rate probably stayed at 7.7 percent.

Jobless claims rose by 28,000 to 385,000 last week, the highest since Nov. 24, Labor Department figures showed in a report that reflected the difficulty in adjusting the figures around the Easter holiday and spring break at schools. The median forecast of 47 economists in a survey called for a drop to 353,000.

Wal-Mart Stores Inc. (WMT:US), the world’s largest retailer, sold $5 billion of debt in four parts in its biggest sale in two years, since raising $5 billion in April 2011 in a four-part sale.

The company’s $1 billion of 0.6 percent, three-year notes yield 30 basis points more than similar-maturity Treasuries, its $1.25 billion of 1.125 percent, five-year securities pay a relative yield of 45 basis points, $1.75 billion of 2.55 percent, 10-year bonds have an 82 basis-point spread and $1 billion of 4 percent, 30-year debt pays 102, according to data compiled by Bloomberg.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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