Energy Future Bonds Soar as Utility Asks Lenders to Reject Default Claim

Energy Future Holdings Corp. bonds soared after the utility asked lenders to change the terms of its debt agreement to reject a claim it defaulted on a loan and to push out maturities.

The former TXU Corp. said that “based on private negotiations,” it expects lenders holding more than 50 percent of the loans and commitments under its senior secured credit facilities will approve the amendment, according to a regulatory filing today.

Energy Future, taken private in 2007 by KKR & Co. and TPG Capital in the largest leveraged buyout in history, is asking that lenders acknowledge the debt complies with the credit agreement. That would resolve a claim made in February by hedge fund Aurelius Capital Management LP that intercompany borrowings weren’t completed at a so-called “arm’s-length basis,” meaning they may not have been made in good faith.

The company is also offering creditors “the right to extend” the first-lien term loans by three years to October 2017 and increase the interest rate by 1 percentage point, today’s filing said. The Dallas-based electricity provider wants to move out the revolving credit line maturity by three years to October 2016.

Energy Future will pay 50 basis points to lenders that consent to the amendment by 12 p.m. April 7 in New York. If the extension becomes effective, it will give 3.5 percentage points upfront to lenders that agree to push out the maturities on their loans by April 12. The company will be required to sell senior secured notes to satisfy the terms of the extension, it said in the filing.

‘Paying the Banks’

“The company has shifted from dismissing our claims to paying the banks to waive them,” Mark Brodsky, chairman of New York-based Aurelius, said in an e-mail. “What we have learned in the interim confirms our view that an event of default has occurred.”

The allegations are “utterly meritless,” Robert Walters, general counsel of Energy Future, said in a February telephone interview.

“We are taking advantage of the current markets,” Lisa Singleton, an Energy Future spokeswoman, said in a telephone interview. “It’s just another step in trying to improve our balance sheet.”

Energy Future’s $1.87 billion of 10.25 percent bonds due in November 2015 rose 7.5 cents to 67.25 cents on the dollar as of 9:25 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Its $1.4 billion of 10.5 percent notes due in November 2016 climbed 14.75 cents to 70 cents on the dollar, Trace data show.

Credit Swaps

Five-year credit-default swaps protecting against a default by Energy Future dropped 4.5 percentage points to a mid-price of 34 percent upfront as of 8:56 a.m. in New York, according to broker Phoenix Partners Group in New York. That’s in addition to 5 percentage points a year, meaning it would cost $3.4 million initially and $500,000 annually to insure $10 million of the company’s debt for five years. The contracts had surged as high as 48.3 percent on March 14, according to data provider CMA.

Swaps on unit Texas Competitive Electric Holdings Co. also dropped, declining 6 percentage points to 42 upfront, Phoenix data show.

Energy Future is rated Caa2 by Moody’s Investors Service and CCC+ by Standard & Poor’s. High-yield, high-risk bonds are rated below Baa3 by Moody’s and lower than BBB- by S&P.

Speculative-grade companies raised $149 billion of loans, the most since the three months ended December 2007, according to data compiled by Bloomberg. Borrowers used $87 billion of the proceeds to refinance debt, a quarterly record, according to Standard & Poor’s Leveraged Commentary and Data.

The extra yield investors demand to own junk bonds instead of Treasuries has narrowed to 477 basis points from 541 basis points at the end of 2010, according to Bank of America Merrill Lynch’s US High Yield Master II Index.

To contact the reporters on this story: Mary Childs in New York at mchilds5@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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