Creditors firm stance in bankruptcy of Texas’ largest power provider

By Charles Mead & Mary Childs
Bloomberg News

A group of Energy Future Holdings Corp. secured creditors including Apollo Global Management LLC is breaking from competing lenders as it seeks to squeeze value out of the electricity provider in a debt restructuring.

Apollo, along with Centerbridge Capital Partners LLC and Oaktree Capital Group LLC, have committed to another week of negotiations to resolve how investors will carve up ownership of the former TXU Corp., according to a regulatory filing yesterday and people with knowledge of the discussions. Junior debtholders including York Capital Management LP have pulled out of confidential talks, the people said.

The filing sheds new light on how investors are positioning themselves for a potential bankruptcy filing by Nov. 1 for Texas’s largest electricity provider. After investing $8 billion to take control of TXU in 2007 in the biggest leveraged buyout in history, owners KKR & Co., TPG Capital and Goldman Sachs Capital Partners may see their equity stake collapse to less than 5 percent under one proposal described in the disclosure.

“There are so many parts of the capital structure and so many competing interests, it’s going to make any negotiation difficult,” Marc Gross, a money manager at RS Investments in New York who oversees $3.5 billion, said in an e-mail. “There’s never enough value to go around no matter what the recovery in any bankruptcy.”

Three Proposals

The filing outlines three proposals and highlights a rift between some owners of $1.48 billion of 11.25 percent, unsecured payment-in-kind notes linked to Energy Future’s regulated business and investors in more than $20 billion of first-lien debt contained in an unregulated subsidiary.

Holders of Energy Future Intermediate Holding’s so-called PIK notes, which can pay interest with additional debt, proposed receiving $1.45 billion of cash and a $100 million note that doesn’t pay interest, according to the filing.

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That conflicts with an offer from secured lenders to Texas Competitive Electric Holdings who allocated $800 million in cash to split among the PIK bondholders, additional unsecured creditors and private-equity sponsors. The first-lien group includes Centerbridge, Apollo and Oaktree, according to people familiar with the talks who asked not to be identified, citing lack of authorization to speak publicly.

Undervalued Stake

The PIK lenders include York, Avenue Capital Group LLC and P. Schoenfeld Asset Management LP, one of the people said. That group, which owns less than two-thirds of the bonds, walked away from talks while directing “their advisors to continue to work with the companies and their advisors to explore further whether the parties can reach an agreement,” the filing shows.

The group may have exited negotiations because they thought their stake was being undervalued, according to Sarah Gefter, a distressed-debt analyst at Reorg Research.

“The Energy Future Intermediate PIK is one of the strongest classes of creditors,” with the one of the best negotiating positions, she said in a telephone interview. “They have a fundamentally different view on value. They think they should get par based on the value of Energy Future Intermediate or more than par.”

Allan Koenig, a spokesman at Energy Future, declined to comment on the reorganization discussions, as did Andrea Williams, a spokeswoman for Oaktree, Mary Beth Grover, a spokeswoman for York Capital at the Abernathy MacGregor Group and Catherine Jones, a spokeswoman for Schoenfeld at ASC Advisors LLC.

First-Lien Price

Fran McGill, a spokesman for Apollo at Rubenstein Associates, Todd Fogarty, a spokesman for Avenue Capital at Kekst & Co., and a representative for Centerbridge also declined to comment.

The 11.25 percent bonds due December 2018 traded at 77.25 cents on the dollar Sept. 13 to yield 18.2 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. A $15.4 billion first-lien term loan due 2017 was valued at 67.7 cents yesterday, according to prices compiled by Bloomberg.

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The power provider has struggled to reduce debt since it was taken over in a $48 billion deal six years ago. The leveraged buyout left Energy Future with more than $40 billion of obligations in an unsuccessful bet natural gas prices would rise.

How much of a reorganized Energy Future the private-equity owners would retain is another point disputed in the three proposals.

Third Plan

The company is due to make about $270 million in interest payments Nov. 1 — cash first-lien lenders want the company to retain by filing for bankruptcy.

The restructuring of Energy Future won’t change any operations, customer service or involve cutting jobs or employee benefits, according to a company letter sent to staff today obtained by Bloomberg News, the contents of which were confirmed by Koenig, the company spokesman.

A third plan, from a “significant creditor” with claims linked to multiple units, proposed that the Texas Competitive Electric Holdings lenders receive 94.2 percent of the equity in the parent company and about $8 billion of cash while unsecured Energy Future Intermediate Holding bondholders would get “par recovery over time,” the filing shows.

That plan allotted 2 percent of the new equity plus 2 percent of a new tracking stock to the current sponsors. Private-equity owners said in April they’d support a deal that let them retain a 15 percent stake in the company.

All of the plans would keep the company and its units together post-Chapter 11.

“Because it’s such a complicated structure with so many layers, it’s impossible to get everybody on the same page,” said Robert Grimm, head of corporate trading at Odeon Capital Group LLC in New York.