Bloomberg News

Energy Future Junior Creditors Test Bid for Fast Bankruptcy Deal

April 30, 2014

Luminant Lake Hubbard Natural Gas Power Plant

The Luminant Lake Hubbard natural gas power plant, a subsidiary of Texas Energy Future Holdings LP, in Dallas. Photographer: Matt Nager/Bloomberg

Energy Future Holdings Corp. (0763895D:US), the Texas power company that plans to leave bankruptcy in less than a year, can’t reduce its $50 billion in debt without fighting junior creditors who face losing their investment.

The Dallas-based electricity provider, taken private seven years ago by Henry Kravis and David Bonderman in a record leveraged buyout, filed for bankruptcy yesterday in Wilmington, Delaware, after months of wrangling among creditors (TXU:US), owners and management yielded a restructuring proposal.

Second-lien noteholders owed about $1.6 billion say they were shut out of those talks and want court permission to probe what they call management’s “disabling conflicts of interest.” They also want the case moved to Texas.

Managers artificially drove down the true value of Energy Future “to allow the senior lenders and management to print cheap reorganized equity and wipe out billions in legitimate creditor claims,” the trustee representing the junior creditors said in court papers filed minutes after the Chapter 11 petition.

Under the proposal announced yesterday, the company’s deregulated Texas Competitive Electric Holdings unit would separate from Energy Future. The plan would hand ownership of Texas Competitive to creditors in exchange for eliminating $23 billion in debt.

That deal could give senior lenders “recoveries in excess of their claim,” the trustee for the junior creditors said in its filing.

Allan Koenig, a spokesman for Energy Future, had no immediate comment on the motion.

More Influence

Senior lenders, who typically have more influence over a bankruptcy case than lower-ranked creditors because they have higher priority to be paid, back the debt-cutting plan. Energy Future, which is seeking to get through bankruptcy in 11 months, may have to strike a deal with the junior creditors, according to Andy DeVries, an analyst at debt-researcher CreditSights Inc.

“We expect these second-lien holders will settle for a sliver of equity or even warrants that justifies their current price,” DeVries wrote in a report yesterday. “Given the quick turnaround time they are seeking, we expect the first liens to accommodate the second liens solely to avoid a prolonged fight.”

The trustee, Wilmington Savings Fund Society FSB, asked U.S. Bankruptcy Judge Christopher Sontchi for permission to obtain documents from the company and question managers under oath.

Paid After

WSFS is the trustee for the $1.6 billion in second-lien notes due 2021, which come after $24 billion in first-lien debt and before $6 billion in lower priority debt.

Christopher Ward, a lawyer in the Wilmington office of Polsinelli PC, a law firm that isn’t involved in the case, said the request for a venue change probably won’t cause much delay. Sontchi and other Delaware judges have dealt with transfer requests in the past “expeditiously,” handing out rulings within weeks, he said.

The request to probe management “throws a little wrinkle into the plan” but also isn’t likely to delay an exit from bankruptcy, he said. The company can set up a litigation trust to handle any court disputes while it carries out its exit plan on a separate track, he said.

Main Creditors

“We are pleased to have the support of our key financial stakeholders for a consensual restructuring,” Chief Executive Officer John Young said in a statement.

The bankruptcy filing comes after deregulation opened Texas’s wholesale energy market to competition. Energy Future, formerly known as TXU Corp., had bet wrongly that the price of natural gas, used to make electricity, would rise enough to justify the company’s $48 billion price.

Texas’s largest electricity provider traces its roots to a business that first powered electric lights in Dallas in 1882. Kravis and Bonderman took the company private in 2007 in the biggest-ever leveraged buyout.

The deal, coming at the peak of a three-year boom in leveraged buyouts, turned into a big loss for Kravis’s KKR & Co. (KKR:US), as well as Bonderman’s TPG Capital and Lloyd Blankfein’s Goldman Sachs Capital Partners, which loaded the company with debt. Investors including those companies will get 1 percent of the stock in the reorganized company, according to a court filing yesterday.

Shale Boom

The buyout, larger even than KKR’s 1989 takeover of RJR Nabisco Inc., left Energy Future struggling to reduce debt when the financial crisis, coupled with booming shale production, sent gas prices down starting in 2008.

Billionaire Warren Buffett called his $2 billion investment in Energy Future bonds “a big mistake.”

Energy Future (TXU:US) said it has commitments for bankruptcy financing totaling more than $11 billion, including $7.3 billion for Energy Future Intermediate Holding.

As part of the financing, some bondholders are planning a $1.9 billion capital infusion with a 5 percent fee that will function both as a debtor-in-possession loan and a rights offering, according to a person familiar with the matter.

The company has about 9,100 employees, most of whom work in three main businesses: electricity generation, retail electricity sales, where they face competition, and the rate-regulated transmission and distribution business, according to a filing.

Tax Bill

One dispute in pre-bankruptcy talks was over whether to break up the company. Splitting the regulated and deregulated portions of Energy Future might trigger a tax bill (TXU:US) of more than $7 billion, people with knowledge of the matter had said. The company said the arrangement announced yesterday won’t set off any “material tax liability.”

About $3.1 billion in debt would be canceled at the holding companies that own the regulated utility Oncor. About $31 billion of its funded debt was issued by the generation business and its affiliates and $7.7 billion by the entity that owns Oncor.

Yesterday’s petition listed assets of $36.4 billion and debt of of $49.7 billion. The bankruptcy (0763895D:US) ranks with Enron Corp.’s $48.9 billion collapse in 2001.

The objecting bondholders say the case belongs in a Dallas federal court, just a nine-minute walk from the company’s headquarters, which would mean managers spend less time traveling to hearings.

Railroad Commission

The company’s main environmental and utility regulators are also in Texas, including the state Railroad Commission, which could force the company to post $1.1 billion in cash to cover any environmental damage at a company mine, the bondholders’ trustee said.

Energy Future bondholders saw their investments dive as gas prices plunged to less than $2 from a July 2008 high of more than $13 per million British thermal units. The company made $5 million in the third quarter of 2013, its first net income since the fourth quarter of 2010.

Funds such as Leon Black’s Apollo Global Management (APO:US) LLC, Howard Marks’s Oaktree Capital Group LLC (OAK:US) and Centerbridge Capital Partners LP amassed Energy Future debt after the buyout, giving them a seat at the negotiating table when the company sought to reach a restructuring deal with creditors.

The $1.9 billion capital infusion will be funded by five holders of the company’s “payment-in-kind” notes due 2018, a person familiar with the matter said. They are Avenue Capital Group, York Capital Management, GSO Capital Partners, Third Avenue Management and Peter Schoenfeld Asset Management, said the person, who requested anonymity because the matter isn’t public.

Rights Offering

The financing, which becomes a $2 billion loan including a 5 percent fee, will function as a rights offering, the person said, open to outside parties including other PIK noteholders and Fidelity Management & Research Co. Fidelity manages $1.9 trillion of assets and owns debt in at least seven parts of the company.

The infusion will be part of the $7.3 billion in operating funds in total for the Energy Future Intermediate Holding unit, according to the person. Texas Competitive Electric Holdings has about $4.48 billion in proposed financing, according to the company statement.

Kirkland & Ellis LLP (1132L:US) is the company’s main bankruptcy counsel, and its advisers include Evercore Partners (EVR:US) Inc. and Alvarez & Marsal North America LLC, according to the petition.

The case is Energy Future Holdings Corp., 14-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporters on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net; Tiffany Kary in New York at tkary@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net

To contact the editors responsible for this story: Andrew Dunn at adunn8@bloomberg.net Fred Strasser


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