A group of hedge funds is pushing to extract an extra $431 million from bankrupt Energy Future Holdings Corp., claiming they’re entitled to the money because the power company paid off its debt to them early.
BlueMountain Capital Management LLC, Cyrus Capital Partners LP and Halcyon Asset Management LLC asked a federal judge Monday to let them try to overturn Energy Future’s decision to refinance almost $3 billion in first-lien notes without paying them a “make-whole” premium. The hedge funds and other noteholders claim they should get the money to compensate them for lost interest.
Other creditors of Energy Future, along with the company’s owners, are watching the three-day court hearing in Wilmington, Delaware. A hedge fund victory would give them money that would go instead to the company’s debt holders and its owners, a committee of Energy Future unsecured creditors said in an April 13 letter to U.S. Bankruptcy Judge Christopher Sontchi.
Noteholders argue that, outside of bankruptcy, their debt contract would require the make-whole payment because they are being paid off before the debt matures, depriving them of the full interest they are due. Such payments are commonly required in high-yield debt contracts.
After filing for bankruptcy last year, Energy Future won permission to repay $3.99 billion of first-lien debt of the company’s profitable power-distribution unit. The company is now setting up an auction for the unit, which owns a controlling stake in Oncor, the biggest transmission company in Texas.
As part of the refinancing, noteholders were given the option of settling the make-whole dispute by accepting a smaller payment or fighting in court for the full amount.
About two-thirds of noteholders owed almost $3 billion rejected the settlement, Christopher Kearns, a financial adviser for the group, said Monday in court.
After Sontchi approved the refinancing, Delaware Trust Co., the indenture trustee for noteholders, sued to establish their right to the entire premium.
Sontchi previously ruled against the noteholders, dismissing one of their arguments, but scheduled a trial on another legal question that the investors are trying to use to keep alive their demand for the premium.
Specifically, the hedge funds want Sontchi to lift the temporary ban on legal actions that Energy Future enjoys while it’s in bankruptcy. The funds would then file papers to try to force Energy Future to pay the make-whole premium.
The Chapter 11 case is Energy Future Holdings Corp., 14-bk-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington). The lawsuit is Delaware Trust Co. v. Energy Future Holdings Corp., 14-ap-50363, in the same court.