Energy Future Nearing Bankruptcy as Creditors Said to Align

Mar 29, 2014 12:56 pm ET

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March 29 (Bloomberg) -- Energy Future Holdings Corp., the power producer taken private in the biggest-ever leveraged buyout, moved a step closer to a bankruptcy plan after a key creditor neared a reorganization agreement, according to two people with knowledge of the talks.

Fidelity Investments, which holds some of Energy Future’s $45.6 billion of debt, is hashing out terms for the plan, which is being discussed by the power producer’s management, two groups of unsecured creditors and the private-equity owners who took it over, said the people, who asked not to be identified because the talks are private.

The investment firm’s participation in negotiations is crucial because it enables Energy Future to enter bankruptcy with a pre-arranged plan that would reduce the time it takes to reorganize in Chapter 11. Fidelity has been a holdout among creditors to the company formerly known as TXU Corp., which KKR & Co., TPG Capital and Goldman Sachs Capital Partners bought for $48 billion in 2007.

“Getting Fidelity back to the table for serious negotiations and hearing even a hint of a deal is a key turning point,” Erik Gordon, a business professor at the University of Michigan in Ann Arbor, said in an e-mail. “A reasonable deal is to everyone’s benefit and the process needs some forward momentum. With that, it’s likely to succeed.”

40 Cents

Under terms being discussed, Fidelity would get almost 40 cents on the dollar in cash for notes it holds in the parent company of the power producer, one of the people said. The Boston-based money manager had rejected a previous offer for a debt swap valued at 10 cents on the dollar, according to a Nov. 1 filing with the U.S. Securities and Exchange Commission.

Fidelity, which manages $1.9 trillion of assets, owns debt in at least seven parts of Energy Future, according to data compiled by Bloomberg. Because varying levels of seniority in the holdings determine which creditors are paid first, the firm has been left in the position where any reorganization decision would favor some assets over others.

Adam Banker, a spokesman for Fidelity, declined to comment, as did Adam McGill, a spokesman for Energy Future.

Energy Future’s $92 million of 5.55 percent notes due in November surged 18.8 cents on the dollar yesterday to trade at 31.8 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Fidelity held as much as 16 percent of those securities as of Dec. 31, according to data compiled by Bloomberg.

Auditor Doubts

Discussions, which may still fall through, also include about $7.2 billion of loans that would fund the Dallas-based company’s regulated business during bankruptcy, the people said. A $5.2 billion, two-year portion of the debtor-in-possession financing would be provided by Citigroup Inc., Morgan Stanley and Deutsche Bank AG that would come 30 days after the start of the case.

Energy Future may file for bankruptcy by next week when auditors are expected to raise doubts about its ability to remain a going concern. Any such qualification would constitute a default under terms of the company’s secured debt, Fitch Ratings analysts Shalini Mahajan and Philip Smyth wrote in a Dec. 3 note.

The power producer’s acquisition was essentially a bet, using $40.1 billion of debt, that natural-gas prices would rise. Instead prices, which set the cost of electricity in the Texas market, have fallen 67 percent since July 2008.

Tax Bill

Energy Future earned $5 million in the third quarter of 2013, its first net income since the fourth quarter of 2010, according to data compiled by Bloomberg. Total liabilities were $50.2 billion as of Sept. 30, compared with total assets of $38.7 billion.

The company also is vying for an orderly bankruptcy to avoid being saddled with a $2 billion tax bill. That liability could be triggered if it fails to keep the regulated and deregulated divisions intact, Energy Future said in an April 15 regulatory filing. That would put the recovery of some unsecured classes of investors in jeopardy.

Previous negotiations fell apart last year right before Energy Future made a $270 million interest payment on Nov. 1 to junior bondholders, money that senior lenders didn’t want to see leave the company.

Proceeds from the company’s debtor-in-possession loan would be used to repay the first-lien bonds at the regulated unit, Energy Future Intermediate Holding, and would pay 3.25 percentage points more than the London interbank offered rate with a 1 percent minimum on the benchmark, the people said.

A second loan for as much as $2 billion would give the company the option of repaying existing second-lien debt at the Intermediate division and would convert to equity after the reorganization, the people said.

Energy Future’s deregulated unit, Texas Competitive Electric Holdings, is separately arranging more than $4 billion of DIP financing for that business, another person said earlier this month.