Energy Future’s ‘Make-Whole’ Tender Offer Survives Appeal

Tender offers that might not be possible outside of bankruptcy court got a blessing from a federal district judge in an appeal involving the reorganization of Energy Future Holdings Corp.

Energy Future, the Dallas-based power generator and distributor, filed for Chapter 11 reorganization in April and got bankruptcy court approval in June to settle with holders of two issues of first-lien notes issued by the unit that owns 80 percent of the company’s regulated Oncor power-line business.

The settlement allowed Energy Future to pay off first-lien debt with 5 percent extra for holders who gave up claims for a so-called make-whole, a premium investors can collect when their bonds are paid off early. The settlement was financed with a $5.4 billion loan approved at the same time.

The indenture trustee for one of the noteholder groups appealed and contended that the settlement was a coercive tender offer that wouldn’t pass muster outside bankruptcy and shouldn’t have been allowed in bankruptcy either.

Delaware Trust Co., as indenture trustee for holders of 10 percent first-lien notes, argued on appeal that the decision established a precedent which would “open a Pandora’s Box of coercive tender offers in Chapter 11.”

The trust company said the offer was unfair because one set of noteholders got a 62 percent recovery on the make-whole while the return was only 25 percent for the other “identically situated” group.

Differing Recoveries

U.S. District Judge Richard G. Andrews in Wilmington, Delaware, explained in his 17-page opinion that the differing recoveries resulted from maturity dates and interest rates on the two issues that weren’t identical.

The judge rejected the argument that tender offers can’t be used in Chapter 11 reorganizations before plan approval because the Securities and Exchange Commission isn’t involved in the process of approving solicitation materials as it would be outside of bankruptcy.

The judge also rejected the contention that differing recoveries for similarly situated creditors are permissible only through Chapter 11 plans. As for unequal treatment, Andrews said bondholders not accepting the settlement kept the right to sue for the full amount of the make-whole.

Andrews rejected the argument that Section 1123(a)(4) of the Bankruptcy Code was violated because it proscribes unequal treatment of similar claims. Even assuming that section applied to pre-plan settlements, it permits creditors to accept different treatment voluntarily, the judge said.

Original Plan

Energy Future worked out a reorganization plan with some senior lenders before its Chapter 11 filing. That plan would have used a tax-free spinoff structure. Facing opposition from some creditor groups and reluctance by the bankruptcy judge to approve a $1.9 billion refinancing, the company said in July that it was abandoning the initial plan. The settlement regarding the make-whole wasn’t affected.

To move the reorganization forward, the bankruptcy judge last month approved procedures for an auction of Oncor that doesn’t necessarily require a tax-free structure.

Formerly TXU Corp., Energy Future was taken private seven years ago by KKR & Co., Goldman Sachs Group Inc. and TPG Capital in a record $48 billion leveraged buyout. The company filed for Chapter 11 on April 29 with about 70 affiliates. Its petition listed assets of $36.5 billion and debt totaling $49.7 billion.

The company has 14 power plants with a combined capacity of 15,400 megawatts, making it the largest unregulated electricity provider in Texas.

The appeal is Delaware Trust Co. v. Energy Future Holdings Corp. (In re Energy Future Holdings Corp.), 14-cv-00723, U.S. District Court, District of Delaware (Wilmington).

The Chapter 11 case is Energy Future Holdings Corp., 14-bk-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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