Defaulted Energy Future Bonds Soar on Bankruptcy ConflictRichard Bravo and Steven Church
Energy Future Holdings Corp.’s unsecured bonds are soaring to the highest level in a year as junior creditors challenge the power producer’s plan to restructure about $40 billion of debt in bankruptcy.
Bonds of the company that don’t have senior claims on assets returned 37.1 percent since April 29, when it filed for Chapter 11 protection, beating the 1.7 percent gain for all high-yield, high-risk securities, according to data compiled by Bloomberg. Energy Future, formerly known as TXU Corp., was the subject of a record $48 billion leveraged buyout in 2007.
The rally shows rising speculation that the plan may be blocked, increasing returns for some junior creditors and providing recoveries for others who were deemed out of the money. U.S. Bankruptcy Judge Christopher Sontchi assured lower-ranking lenders including Appaloosa Management LP and Marathon Asset Management LP last week that they’d have an opportunity to challenge Energy Future’s reorganization plan, adding he wasn’t yet “buying into” any method being used to value the company’s assets this early in the case.
“It’s largely optimism around a potential valuation fight,” Amer Tiwana, a Stamford, Connecticut-based managing director with CRT Capital Group LLC, who is following the proceedings, said in a telephone interview. “If you start moving pieces, it’s like a brick house, the whole thing falls apart; their objective is to make the building shake a little bit so one or two bricks fall out.”
Energy Future’s $1.83 billion of 10.25 percent notes due November 2015 closed at 12.25 cents on the dollar June 10, up from 6 cents on April 29 and the highest level since May 2013, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds ended yesterday at 12.125 cents.
Allan Koenig, a spokesman for Dallas-based Energy Future, declined to comment on the creditor negotiations.
“The fact that they’re in Chapter 11 and the court is allowing the unsecured bondholders to challenge” the reorganization is causing the bonds to rally, J. Scott Victor, founding partner of SSG Capital Advisors LLC, a boutique investment bank in West Conshohoken, Pennsylvania, that specializes in restructurings, said in a telephone interview.
In a deal structured with some lenders in April, the company proposed separating its deregulated Texas Competitive Electric Holdings unit from Energy Future and handing ownership of that business to senior creditors in exchange for eliminating $23 billion in debt. The transfer of equity would be accomplished via a “tax-free spin,” according to an April 30 regulatory filing.
The company valued its assets at less than the amount owed to the most senior lenders, leaving little for other creditors. Junior creditors owed $7.7 billion by Texas Competitive would receive about $350 million, according to a court document filed on April 29.
Lower-ranked creditors are fighting the restructuring, which has the blessing of at least 41 percent of the senior lenders, according to the April 29 filing. Investors who own the first-lien debt at Texas Competitive include Angelo Gordon & Co., Apollo Global Management LLC and Centerbridge Capital Partners LP.
Sontchi, who promised bondholders a chance to oppose the economic assumptions underlying the deal, will consider allowing Energy Future to sign the restructuring agreement as soon as this month.
Texas’s largest electricity provider traces its roots to a business that first powered lights in Dallas in 1882. The 2007 going-private deal, coming at the peak of a three-year boom in leveraged buyouts, turned into a big loss for Henry Kravis’s KKR & Co., as well as David Bonderman’s TPG Capital and Goldman Sachs Group Inc.’s private-equity unit, which loaded the company with debt.
Energy Future bondholders saw their investments dive as gas prices plunged to less than $2 from a July 2008 high of more than $13 per million British thermal units. The higher natural gas prices rise, the more electricity producers can charge for their power because plants that use the fuel are easily turned on and off. That means that gas-fired plants provide the marginal power that is used to determine market prices.
Since hitting the low in April 2012, gas has risen to $4.53, according to prices compiled by Bloomberg. The company lost $609 million in the first quarter after having been unprofitable for four consecutive years, according to regulatory filings.
Lawyers for lower-ranking creditors, including Appaloosa, Marathon and Mount Kellett Capital Management LP, plan to investigate how company managers concluded there wasn’t enough value in the unit to pay much to second-lien noteholders and unsecured creditors.
As of June 4, those three firms held almost $634 million of Texas Competitive’s 15 percent, second-lien notes due April 2021, according to a court document filed June 4. Those securities traded at 41.5 cents on the dollar yesterday, up from 24.5 cents the day Energy Future filed bankruptcy.
Should the lawyers find evidence that managers acted inappropriately, Sontchi said he will allow a valuation investigation as soon as possible. “I’ll stop the bus,” he said.