KKR to TPG Stakes Seen Cut Down in Energy Future WorkoutRichard Bravo and Jeffrey McCracken
Energy Future Holdings Corp.’s owners including KKR & Co., TPG Capital and Goldman Sachs Capital Partners will get a reduced stake in the power provider under a pre-negotiated bankruptcy proposal being hammered out between two of its creditor groups.
Secured lenders plan to meet with bondholders later this week to complete an offer that would give Energy Future’s owners, which took the company private in a record $48 billion leveraged buyout in 2007, 9 percent of the equity to share with unsecured lenders in a reorganized corporation, according to three people with knowledge of the negotiations.
The company formerly known as TXU Corp. is seeking a reorganization that would pare its $43.6 billion of debt before Nov. 1, when it has to make a $270 million coupon payment. The Dallas-based company offered senior creditors a deal to restructure $32 billion of debt at its deregulated Texas Competitive Electric Holdings unit that would have given sponsors 15 percent equity in the new company, according to an April 15 regulatory filing, which said the proposal was rejected.
“Given how far out of the money the sponsors are, they are lucky to even have a seat at the table,” Andy DeVries, an analyst at New York-based debt researcher CreditSights Inc., said in an e-mail. “The only reason they are getting a say is because the first-lien lenders want a quick trip through bankruptcy court so they threw the sponsors a bone to prevent a drawn-out court process.”
The restructuring would be the largest in the energy sector and the seventh-biggest on record since 2000, according to data compiled by Bloomberg.
Adam McGill, a spokesman at Energy Future, declined to comment on the potential offer.
Energy Future has struggled to reduce borrowings since it was taken private in a gamble that natural gas prices that help set electricity rates would rise. Instead, wholesale electricity rates have dropped as natural gas prices declined about 72 percent from a July 2008 high. Power prices in Texas averaged $42 a megawatt hour for June through August 2013, compared with a three-year average of $77, according to CreditSights.
The power provider’s quarterly loss narrowed to $71 million for the period ended June 30, its 10th consecutive cash outflow, according to data compiled by Bloomberg. Excluding one-time items, the operating loss was $450 million, compared with $233 million a year earlier, according to an Aug. 2 filing, as sales fell at its competitive power business because of mild weather and refueling of a nuclear plan.
In the plan currently being negotiated, bank lenders to the power generator’s most-indebted unit, Texas Competitive, would receive 91 percent of the equity in the new company, up from the 85 percent offer that Energy Future disclosed in the April filing, said the people, who asked not to be identified citing lack of authorization to speak publicly. Those creditors are developing the proposal with bondholders of the Energy Future Intermediate Holding Co. unit, the indirect parent of the regulated and profitable power-line utility Oncor Electric Delivery Co.
In rejecting the power provider’s initial bankruptcy offer, senior lenders demanded the company restructure the balance sheet at Energy Future Intermediate to halt cash outflows and an increased equity share, according to the filing.
If the creditor groups come to an agreement on the proposal, they would probably present the plan to Energy Future and its owners, one of the people said. The secured creditors, who are represented by law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP and financial adviser Millstein & Co., are expected to meet at the end of this week with advisers for the unsecured bondholders at Energy Future Intermediate, who are advised by Centerview Partners LLC and Akin Gump Strauss Hauer & Feld LLP.
“This is the polar opposite of what second-lien holders were hoping for, as they were expecting a drawn-out bankruptcy that lasted until gas prices or heat rates improved in Texas, both of which are one-to-two year timeframes,” CreditSights’ DeVries said.
The company’s $1.23 billion of 15 percent second-lien bonds due April 2021 dropped 1 cent to 18 cents on the dollar at 10:14 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the lowest level the security has reached since it was issued in October 2010.
Moody’s Investors Service said in a Sept. 9 report that holders of the senior secured first-lien notes from Energy Future Intermediate may recover 68 percent and owners of similarly ranked debt at Texas Competitive Electric Holdings 63 percent, while senior-unsecured lenders at Texas Competitive and the parent “would be pretty much wiped out,” recouping as little as 4 percent in a bankruptcy.
The company’s $15.4 billion term loan that expires in October 2017 traded at 68.5 cents today, up from 67.6 cents on Sept. 3, according to data compiled by Bloomberg.
KKR, TPG and Goldman Sachs contributed an $8.3 billion equity stake in Energy Future, they disclosed in 2008. By March 2012, KKR had written down its equity in the company to 5 cents on the dollar, according to a regulatory filing.
Senior lenders at Texas Competitive leading negotiations include Apollo Global Management LLC, Oaktree Capital Group LLC and Franklin Resources Inc.
Energy Future and its units have retained law firm Kirkland & Ellis LLP and restructuring advisers Evercore Partners, while senior creditors have retained law firm Paul, Weiss and Millstein, according to the April 15 filing. Apollo hired Moelis & Co., according to two people familiar with the discussions, who asked not to be identified because the talks are private.