A $1 Billion Price Tag to Avoid Default

When Henry Kravis's KKR (KKR) and David Bonderman's TPG Capital paid $43.2 billion—much of it borrowed—for Texas energy company TXU in October 2007, it was the biggest buyout in history. Since the deal, natural gas prices have plunged more than 39 percent, curbing the Dallas-based utility's revenue, which fell to $8.2 billion last year from $11.4 billion in 2008. Now the company, renamed Energy Future Holdings, may pay more than $1 billion to renegotiate some of its loans.

Lenders holding $15.37 billion of term loans agreed to push their due date to 2017, according to an Apr. 13 news release. They also agreed to extend revolving line of credit and letter of credit loan maturities. In return, the company offered to pay its lenders a 3.5 percent fee and an extra 1 percentage point a year in interest for the extended term and letter of credit loans. That would be $574 million upfront and $164 million in annual interest for as long as six years. On Apr. 7 lenders approved changes to Energy Future's loan agreements to allow the company to address a claim by Aurelius Capital Management, a hedge fund that said it had violated the agreements. Lenders that agreed to the change were paid a fee of half a percentage point of the loan amount, according to a regulatory filing.

Refinancing the debt may only postpone the threat of default. The price of credit insurance on Energy Future, which had long-term debt of $34.2 billion as of Dec. 31, indicates that investors believe it has a 74 percent chance of failing to pay off its loans. "I don't know that this is enough to save them," says Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, N.M. The fees and extra interest are "a lot of dough."

The terms Energy Future is offering are appropriate, Lisa Singleton, company spokeswoman, said on Apr. 4. Spokesmen for TPG and KKR declined to comment. The payment to lenders put claims made by Aurelius "to rest once and for all," Singleton said. On Apr. 1, Mark Brodsky, chairman of Aurelius, said: "The company has shifted from dismissing our claims to paying the banks to waive them."

Energy Future had more than $20 billion of loans maturing in 2014, more than any other company with debt coming due that year, according to JPMorgan Chase (JPM). "If you have a $1 billion loan, you can be like a speedboat," says Marc Gross, a money manager in New York at RS Investments. "If you have $20 billion, you're the Titanic. You've got icebergs coming, and it's very difficult to move."

The company's chances of avoiding default are helped by investors' greater appetite for riskier bonds and loans. The average yield on junk bonds was 7.3 percent as of Apr. 8, down from a peak of 22.4 percent in December 2008, Bank of America Merrill Lynch (BAC) index data show. Energy Future is "trying to take advantage of the credit markets, and you can't blame them for that," says Andy DeVries, an analyst for debt-research firm CreditSights in New York. "It would be fantastic if they could pull this off."

The bottom line: Paying a 3.5 percent fee and another percentage point in interest may help Energy Future renegotiate almost half of its $34.2 billion debt.

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