Energy Future Ducks $431 Million Debt Claimed by Hedge Funds

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Bankrupt Energy Future Holdings Corp. might have an easier route to reorganize after a judge threw out two hedge funds’ demands for an additional $431 million from the utility.

The ruling on Wednesday by U.S. Bankruptcy Judge Christopher Sontchi may influence whether other Energy Future creditors file claims for additional payments. Those groups have been weighing whether to do so, Sontchi said.

Ruling in favor of hedge funds BlueMountain Capital Management LLC and Halcyon Asset Management LLC may have forced Energy Future to pay out as much as $900 million to creditors, threatening the company’s entire reorganization effort, he said.

BlueMountain and Halcyon claimed Energy Future owes them the additional payment because the power company paid off its debt to them early and owed them a “make-whole” premium to cover lost interest. Sontchi didn’t rule directly on the issue.

Instead, he said Energy Future is entitled under bankruptcy law to block a trustee acting on behalf of the hedge funds from suing to force the company to make the payment. When a company files bankruptcy, most lawsuits filed against it are halted while it reorganizes, Sontchi noted.

“That is not to say that a creditor can never successfully pursue a make-whole claim,” Sontchi said. A different debt contract might allow for such a payment in another bankruptcy case, he said.

Debt Contract

The noteholders demanding the make-whole payments have already recovered all of their principal and part of the interest owed to them. They argued that outside of bankruptcy, their debt contract would require a make-whole payment because they were paid off before the debt matured, depriving them of the full interest they were due. Such payments are commonly required in high-yield debt contracts.

After filing for bankruptcy last year, Energy Future won permission to repay $3.99 billion of first-lien debt of the company’s profitable power-distribution unit.

The Chapter 11 case is Energy Future Holdings Corp., 14-bk-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington). The lawsuit is Delaware Trust Co. v. Energy Future Holdings Corp., 14-ap-50363, in the same court.

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