Energy Future Says Plan in Jeopardy After Rebel Lenders Balk

Jul 18, 2014 5:15 pm ET

(Updates with pre-filing negotiations in 11th paragraph.)

July 18 (Bloomberg) -- Energy Future Holdings Corp. said it may reconsider its restructuring plan to pay hundreds of millions of dollars to select creditors after lenders left out in the cold forced talks on a rival deal.

Energy Future was set to lock in its plan before the fight, triggered by a rush to profit off its carcass. The resulting mess now risks scuttling the deal and imperiling the company’s stated goal of exiting bankruptcy in March. A lawyer for Energy Future said today the agreement may be terminated within weeks.

U.S. Bankruptcy Judge Christopher Sontchi already approved two loans totaling $9.9 billion just weeks after the company’s April collapse. The loans are to help the company pay existing creditors, finance the reorganization and reward supportive lenders. Opponents saw a third, $1.9 billion loan as their last chance to challenge the Dallas-based power company’s $42 billion reorganization, which they said favored creditors including Fidelity Investments.

Approving the third loan, the rebels said, would lock in much of the entire plan. A competing proposal, including a Morgan Stanley-backed bid for the bankrupt company’s prize asset, Oncor, by NextEra Energy Inc., has triggered talk among lenders about a likely auction of the unit, said a person familiar with the matter who asked not to be named because the talks are private.

Talks Started

Sontchi, facing opposition by eight lender groups, set four days of hearings starting last month to let everyone have a say. His skepticism eventually sent the company into talks with the dissidents.

“The debtors’ record on these particular issues thus far is fairly thin and is going to need more evidence to satisfy the court,” Sontchi told the company on July 1.

At a hearing today in Wilmington, Delaware, Edward Sassower, a lawyer for the company, said the plan will have to be modified or canceled because of rising prices for the company’s debt and new offers for assets. If changes can’t be made by Aug. 8 at the latest, the deal will be terminated, he said.

“Unless the company’s plan totally ignores the bankruptcy code, it usually takes strength in numbers to get a judge off that path of confirmation,” said Chip Bowles, a bankruptcy lawyer at Bingham Greenebaum Doll LLP who isn’t involved in the case.

Record LBO

Energy Future filed for bankruptcy on April 29, seven years after it was taken private in a record leveraged buyout. The case ranks in size with Enron Corp.’s collapse in 2001. Energy Future’s reorganization plan, drawn up before bankruptcy with “anchor” investors such as Boston-based Fidelity and Pacific Investment Management Co., called for splitting the company.

One creditor group would get the unit that controls Energy Future’s profitable, regulated Oncor electricity distributor. Another would get the unprofitable unit that competes in the power market.

Some lower-ranking creditors told Sontchi soon after the case was filed that they had been left out of negotiations and demanded access to the financial details behind the plan.

While a bankruptcy plan has to be fair, judges often go along with a company’s own turnaround strategy. In the case of Lehman Brothers Holdings Inc., it took a rival proposal by creditors including New York-based Goldman Sachs Group Inc. to shake up the payment priorities.

More Fees

Energy Future said it worked many months to win over enough lenders to refinance the debt from the 2007 buyout by KKR & Co., TPG Capital and Goldman Sachs. It might rack up more fees and miss its goal of exiting bankruptcy in 11 months if the loan and payments aren’t approved, the company said.

A delay could also end with a fairer, “consensual” plan, James Peck, one of the attorneys for the opponents, said at an earlier hearing. Peck was the judge who ran the Lehman bankruptcy case before leaving the bench earlier this year.

Approving the third Energy Future loan will “immediately and irrevocably” lock in parts of the full agreement, giving the best assets to chosen creditors and leaving almost nothing for others, Peck told Sontchi. Some of his disadvantaged constituents will have grounds to sue, he told the judge.

Fidelity owns 73 percent of Energy Future’s unsecured debt, which would give it a stake in Oncor, as well as 30 percent of the securities tied to the $1.9 billion loan, entitling it to an $11 million fee.

More Payments

Along with Newport Beach, California-based Pimco and Western Asset Management Co., it also shares in more than $100 million of payments after offering to put up $500 million of a $5.4 billion loan to the regulated electricity business, according to court filings.

Sontchi said at a hearing on the loan that he wouldn’t hold it against Fidelity and Pimco if they were rewarded for backing the company early on. He waved aside an objection that one payment to the investment funds was twice as generous as the payout to lenders of equal standing.

He also approved a $4.5 billion loan to the unregulated Texas Competitive Electric Holdings business over the heads of junior creditors, who protested that they’ll be paid about 30 cents on the dollar.

After failing to halt the first two loans, the opposition grew too big for Sontchi to ignore. Energy Future didn’t appease opponents by cutting a $380 million fee that would have gone to lenders if it had borrowed elsewhere.

Not Best

That just proved the company hadn’t struck the best deal it could find, said David Rosner, a lawyer for the objecting creditors.

Some investors in Energy Future debt would have pocketed $488 million in fees and special payments on the third loan, equal to a quarter of the amount borrowed. The lenders were charging $147 million in fees for arranging, funding and completing the loan, with a “participation fee” going to Fidelity.

“There were no negotiations of this loan,” Rosner said at a hearing. “It was dictated by lenders.”

A group including Morgan Stanley stepped forward with a rival loan at lower rates, part of the alternative restructuring plan that includes a NextEra takeover of Oncor. Energy Future rejected the group’s offers. Juno Beach, Florida-based NextEra sweetened its terms this week.

Loan Ties

The group also includes Marathon Asset Management LP and Blackstone Group LP and owns more than $1 billion of Energy Future’s debt tied to the third loan, plus other holdings in the company.

In Lehman’s liquidation, Peck moved too slowly for some creditors, who pushed the pace by filing rival payment plans. The New York-based bank still spent more than three years in bankruptcy and hasn’t yet finished selling assets to pay creditors.

Tom Lauria, a lawyer for creditors opposed to the deal, said he was pleased with today’s announcement about the fate of the so-called restructuring support agreement, which precluded the possibility of an asset auction.

“To me that indicates that the RSA really is a thing of the past,” he said. “It sounds like it is going to die.”

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