Energy Future Holdings Corp.’s pre- packaged bankruptcy proposal is the opening salvo in talks as KKR & Co. (KKR:US) and TPG Capital LP, backers of the largest leveraged buyout, seek to salvage their failed utility takeover and force creditors to accept billions in losses.
The company has been in confidential talks to restructure about $32 billion in debt held by its Texas Competitive Electric Holdings subsidiary, according to a filing (TXU:US) yesterday. The initial proposal, rejected by creditors, asked them to forgive debt in exchange for equity in Dallas-based Energy Future and $5 billion in cash or new debt. KKR, TPG and the other private- equity sponsors said they want to retain a 15 percent equity stake (TXU:US).
“What the sponsors are trying to do, they are saying I want to pay as little as I can to own 15 percent of the company,” Joseph DeSapri, a Chicago-based credit analyst at Morningstar Inc. (MORN:US), said in a phone interview yesterday. “I’m not sure that’s the valuation the creditors believe is true.”
The company formerly known as TXU Corp., which Moody’s Investors Service called “too big to liquidate,” has been struggling with debt since its $48 billion takeover in 2007 led by KKR and TPG. Declining natural gas prices have depressed wholesale power rates, hampering plans to reduce the debt and capitalize on its low-cost nuclear and coal-fired output.
Creditors 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,” DeSapri said.
Texas Competitive’s $1.2 billion of 15 percent second-lien notes due in April 2021 fell 4.5 cents to 26 cents on the dollar at 3:55 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
A $3.8 billion loan for Texas Competitive coming due in October 2014 fell 1.25 cents on the dollar, the most in a month, to 74.3 cents, according to prices compiled by Bloomberg.
Senior lenders (TXU:US) at Texas Competitive include Franklin Resources Inc., Apollo Global Management LLC, Oaktree Capital Group LLC and GSO Capital Partners LP.
Creditors told Energy Future they would be willing to accept a pre-packaged proposal if they got more debt and equity and the company addressed negative cash flows, according to yesterday’s filing.
“The cards are on the table,” said James Hempstead, a New York-based analyst for Moody’s. “The company has basically spelled out their opening offer.”
The buyout, which left the biggest power producer in Texas with more than $40 billion in debt, was a gamble that natural gas prices would rise. Instead, they fell to a 10-year low last year in New York.
“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 phone interview yesterday.
Energy Future and its units have retained law firm (TXU:US) 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.
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.
“Creditors are saying there’s too much equity being retained by the private equity guys, and if we’re going to take a haircut then they’re going to keep precious little,” Kenneth Klee, a professor at the University of California, Los Angeles School of Law, said in a phone interview today.
“It’s going to be an interesting battle,” Klee said. “My guess is KKR and TPG would make a deal to take a smaller percentage of the equity in order to get a consensual deal.”
Energy Future’s filing with the Securities and Exchange Commission complies with a confidentiality agreement the power producer made with creditors on March 18, stipulating a public acknowledgment of the restructuring talks.
Energy Future faces a “material restructuring” within six to 12 months, Moody’s said in a March 26 note.
The ratings company said a bankruptcy filing is likely at Energy Future’s Texas Competitive unit, which has $3.8 billion of loans maturing in October 2014. Investors have previously refused to extend the payment date.
KKR, TPG and Goldman Sachs Group Inc. 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.
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 compiled by Bloomberg.
The company’s competitive unit expects its adjusted earnings before interest, taxes, depreciation and amortization to drop to $1.83 billion in 2017 from $2.75 billion in 2013, according to yesterday’s filing.
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