Energy Future Holdings Corp., the power producer that was taken private six years ago in the largest leveraged buyout, proposed a pre-packaged bankruptcy that would put Texas Competitive Electric Holdings, which sells power on wholesale markets, and some other units in Chapter 11.
In an initial plan to restructure Texas Competitive’s $32 billion debt, the unit's first-lien creditors would forgive debt in exchange for equity in the parent company and $5 billion in cash or new debt, Energy Future said today in a regulatory filing. The private-equity sponsors, including KKR & Co. (KKR:US) and TPG Capital LP, informed lenders they would back the plan if they retained 15 percent of the company’s equity interest, leaving 85 percent for holders of the unit’s senior loans.
Creditors didn’t agree to this first offer and have “directed their advisers to continue to work with the companies and their advisers to explore further whether the parties can reach an agreement on the terms of a consensual restructuring,” according to the filing.
“This means nothing until the creditors agree to it,” Joseph DeSapri, a credit analyst at Morningstar Inc., said in a telephone interview. “An 85 percent equity share in the company has to be sufficient for the forgiveness of debt and if it is not, the creditors won’t agree to it.”
Texas’ largest electricity provider, formerly known as TXU Corp., was taken over in a $48 billion deal in 2007 led by KKR, TPG Capital and Goldman Sachs Group Inc. The buyout, which left Dallas-based Energy Future with more than $40 billion in debt, was a gamble that natural gas prices would rise and give its coal-fired plants a competitive advantage. Instead, U.S. prices fell to a 10-year low last year.
“With no significant debt maturity until October 2014, we continue to proactively evaluate possible transactions and initiatives to achieve a more sustainable capital structure, as previously disclosed under our liability management program,” Allan Koenig, a spokesman for Energy Future, said in a telephone interview.
The company’s $1.83 billion of 10.25 bonds due November 2015 traded at 12.8 cents on the dollar today, down from 30 cents on Dec. 27, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Energy Future and its units have retained law firm Kirkland & Ellis LLP and restructuring advisers Evercore Partners, while creditors have retained law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP and Millstein & Co., according to the filing today.
Under the proposal, Texas Competitive would get a $2 billion first-lien revolving line of credit, a $1 billion letter of credit facility and $5 billion of new long-term debt upon completion of the restructuring.
Energy Future’s filing with the Securities and Exchange Commission at about 5:30 p.m. complies with a confidentiality agreement the power producer made with creditors on March 18, stipulating a public acknowledgment of the restructuring talks by today.
Energy Future faces a “material restructuring” within six to 12 months, Moody’s Investors Service said in a March 26 note. The ratings company said a bankruptcy filing is likely at Energy Future’s Texas Competitive unit, which has $29.5 billion in debt, including $3.8 billion of loans maturing in October 2014. Investors have previously refused to extend the payment date.
KKR, TPG and Goldman Sachs contributed an $8.3 billion equity stake in Energy Future, they disclosed in 2008. By March 2012, KKR had written down its equity in the company to 5 cents on the dollar, according to a regulatory filing.
Senior lenders at Texas Competitive include Franklin Resources Inc., Apollo Global Management LLC, Oaktree Capital Group LLC and GSO Capital Partners LP.
Energy Future’s losses may widen as hedging contracts used to shield against fluctuations in gas prices disappear by the end of 2014. Energy Future lost $3.36 billion last year, 76 percent more than its $1.91 billion net loss in 2011, according to data (TXU:US) compiled by Bloomberg.
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