Energy Future Credit Swaps Rise on Aurelius Default Assertion
The cost to protect Energy Future Holdings Corp. debt climbed on speculation over the outcome of hedge fund Aurelius Capital Management LP’s assertion that the power company is in default on a $23.9 billion loan.
Swaps on Energy Future increased 2.2 percentage points to 48.5 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $4.85 million initially and $500,000 annually to protect $10 million of the company’s debt. Contracts on Texas Competitive Electric, a unit of Energy Future, rose 1.6 percentage points to 55.3 percent upfront, CMA data show.
“Everyone thought this was a 2014 story,” said Andy DeVries, an analyst for debt-research firm CreditSights Inc. in New York. “Then Aurelius comes along and all of a sudden this could be a 2011 story. It’s a huge game changer.”
Aurelius sent a letter to Citigroup Inc., the administrative agent on the energy company’s credit line, claiming a loan under Texas Competitive Electric is in default, according to a Feb. 25 filing with the U.S. Securities and Exchange Commission. The allegations are “utterly meritless,” Robert Walters, general counsel of Energy Future, said in a telephone interview that day.
Vote for Default
The Dallas-based power company, formerly known as TXU Corp., was acquired by KKR & Co. and TPG Capital in 2007. As of Feb. 24, Aurelius held about $50 million of the $23.9 billion of outstanding debt under Texas Competitive’s senior secured credit facilities, according to the filing. Energy Future has more than $20 billion of loans coming due in 2014, according to data compiled by Bloomberg.
Speculation that Aurelius lined up more funds to vote that Energy Future is in default is contributing to the increase in swaps, DeVries said. “They would need a lot of support to get that 50 percent threshold” required to force a default, he said.
TXU’s $1.87 billion of 10.25 percent bonds due in 2015 fell 1.75 cents to 53.5 cents on the dollar and have declined from 62 cents on Feb. 24, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
One-year protection on Energy Future climbed 0.55 percentage point to 12.85 percent upfront and one-year contracts on Texas Competitive climbed 0.3 percentage point to 13.2, CMA data show.
Lisa Singleton, a spokeswoman at Energy Future, and Stephen Sigmund, a spokesman for New York-based Aurelius, didn’t immediately return telephone messages seeking comment.
The cost of protecting U.S. corporate bonds from default fell as oil retreated from a 29-month high, easing concern higher energy costs will hurt consumption and corporate earnings.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 0.4 basis point to a mid-price of 83.9 basis points as of 5:26 p.m. in New York, according to index administrator Markit Group Ltd.
Oil declined for the first time in three days in New York as speculation that fighting may subside in Libya eased concern supply cuts will spread through the Middle East.
The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, had been trading in lockstep with oil futures. A measure of correlation between crude futures in New York and the CDX, using 21 days of trading, is at 0.68, down from 0.7 last week, the highest on record, according to data compiled by Bloomberg. The correlation gauges the percent change of the contracts. A reading of 1 shows the assets are moving together, and a -1 reflects the opposite.
Global Default Rate
The global default rate of speculative-grade bond issuers will decline to 1.4 percent by the end of the year, down from 2.8 percent in February, according to Moody’s Investors Service.
Among junk-rated U.S. companies, the rate will decline to 1.6 percent by December from 3 percent in February, Moody’s analysts wrote in a report. Last month’s global default rate was unchanged from January and down from 11.7 percent a year earlier, according to the New York-based ratings firm.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
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