Energy Future Holdings Corp. (TXU), the Texas power company taken private in 2007 in the largest buyout in history, plans to sell $400 million of notes to partially repay intercompany debt that hedge fund Aurelius Capital Management LP has said violates the company’s credit agreement.
The Dallas-based company will sell the second-lien, senior secured notes due in 2022 in a private offering through units Energy Future Intermediate Holding Co. and EFIH Finance Inc., according to a statement today. Proceeds will be used to pay back so-called demand notes owed to its Texas Competitive Electric Holdings subsidiary, the company said in the statement. The company had $1.6 billion of such notes outstanding as of Dec. 31, the company said in a regulatory filing today.
Aurelius Capital, one of Texas Competitive’s creditors, said in a February 2011 letter to loan administrator Citigroup Inc. that the intercompany loans violated Energy Finance’s debt agreements, two people with knowledge of the matter said at the time, declining to be identified because the letter wasn’t made public.
Allan Koenig, a spokesman for Energy Future, declined to comment beyond the public filing. Energy Future General Counsel Robert Walters said in February that Aurelius’s allegations were “utterly meritless.” Stephen Sigmund, a spokesman for Aurelius, declined to comment.
Energy Future may be required to repay a portion or all of demand notes it owes Texas Competitive if the debt is found by a court to be improper, according to the filing. A lender the company didn’t name has claimed as recently as the fourth quarter of 2011 that the intercompany notes “are fraudulent transfers,” the company said.
A committee of credit-default swaps dealers and investors in September rejected a claim by Aurelius that Texas Competitive was insolvent and should have triggered payouts on swaps protecting against a default by the company. The company asked lenders on April 1 to change the terms of its loan agreements and extend maturities on more than $17.8 billion of loans.
Credit swaps protecting against a default by Energy Future declined 0.9 percentage point to 52.7 percent upfront at 2 p.m. in New York, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $5.27 million initially and $500,000 annually to protect $10 million of the company’s debt.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.
Energy Future’s 2011 net loss narrowed to $1.91 billion from $2.81 billion a year earlier, the company said today in a U.S. Securities and Exchange Commission filing. The company didn’t break out quarterly profits.
The company’s units include Oncor, a regulated power-line business; TXU Energy, a retail electricity seller with more than 2 million customers; and Luminant, which owns more than 15,400 megawatts of generation capacity in Texas.
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