Published September 11, 2013
NEW YORK – Chances are growing slim for Texas utility Energy Future Holdings to negotiate a prepackaged bankruptcy with its creditors that would avoid a lengthy spell in Chapter 11, several people close to restructuring talks said this week.
The embattled company has been in talks for months with secured lenders, which hold about $20 billion in debt.
But with interest payments of about $250 million due on November 1 and with several key creditors yet to sign nondisclosure agreements, time is running out to reach a prepackaged restructuring, people close to the negotiations said.
In a prepackaged bankruptcy, the different parties reach a restructuring deal before filing bankruptcy. Such an agreement would need to be in place by about the end of September to give Energy Future time to gain creditor support, two of the people said.
While not impossible, that scenario is unlikely, the people said. The company still hopes to establish at least the framework of an agreement before any Chapter 11 filing.
The company, which has about $1.6 billion on hand, could also choose to make its November 1 payment and extend the discussions, though the people said the sides would like to agree on a deal before then.
Further complicating matters, Energy Future has gradually expanded restructuring talks since early in the year to include different classes of creditors, said the people close to the matter.
Initially limiting contact to the lenders at Texas Competitive Electric Holdings, Energy Future's unregulated merchant power unit, the company by summer was contacting advisers for unsecured bondholders at a subsidiary that owns Oncor, its regulated power delivery business, the people said.
Energy Future, formerly TXU Corp, was taken private in 2007 by a consortium including KKR & Co , TPG Capital Management and Goldman Sachs Group Inc's private equity arm. The $45 billion buyout, the largest-ever leveraged buyout, saddled the company with debt just before a major decline in natural gas prices and energy markets.
With a total of more than $40 billion in debt, Energy Future's large and complex capital structure has hampered restructuring talks. In April, equity sponsors proposed a prepackaged bankruptcy that would have preserved a 15 percent stake in the reorganized entity, handing the rest of the equity to the lenders. But the lenders said the deal neither provided them with sufficient equity nor reduced enough debt across the capital structure to access greater cash flows stemming from Oncor.
Andrew DeVries, a senior credit analyst at CreditSights, called Oncor a "growing business that should generate improved cash flows," but he added that the unit's long-term capital structure is unsustainable, with only enough dividends to cover half of cash interest payments coming due.
In a critical facet of Energy Future's restructuring, parties must also determine how potential changes in ownership could impact tax obligations.
In almost any restructuring scenario, debt reduction would occur largely through creditors accepting equity in exchange for canceling debt, which would create additional taxable income for the company.
"Cancellation of indebtedness income can be sizable in situations like these and can result in a large corresponding tax liability upfront," said Willys Schneider, a tax partner at Kaye Scholer who is not involved in the case.
That could give stakeholders an incentive to wait to reorganize in Chapter 11, under which the company could defer some of that added cost by applying net operating losses or other rules that allow bankrupt companies to reduce tax obligations.
(Additional reporting by Michael Erman; Editing by Kenneth Barry)