Energy Future Holdings creditor mull strategy to bridge value gap

The so-called contingency value right (CVR) would sweeten the pot for unsecured bondholders of the company’s regulated power distribution business if the company meets the goals, the sources said.

The Texas utility, formerly known as TXU, has been trying to cut a deal with its lenders to restructure some $40 billion in debt before filing for bankruptcy, which it is expected to do before year’s end and possibly before an interest payment falls due on Nov. 1.

Senior lenders have insisted that any deal include the debt held by unsecured bondholders of its regulated power delivery business, Energy Future Intermediate Holdings. The unsecured bondholders have balked at an offer of 9 percent of the restructured company.

According to the two people close to the negotiations, the CVR would essentially create a payment that would be made to the unsecured bondholders if certain milestones are met.

Details of the size of the payment or the milestones were not immediately available. Discussions remain in early stages, and no deal is close, the people said.

CVR’s are not particularly common in large corporate bankruptcies.

EFH was taken private in 2007 in a $45 billion buyout, the largest-ever leveraged buyout. The deal saddled the company with debt just before a major decline in natural gas prices and energy markets.

The buyout consortium included private equity firms KKR & Co, TPG Capital Management and Goldman Sachs Group Inc’s private equity arm.

EFH has a large and complex capital structure. Most of its debt sits on the unregulated side, at Texas Competitive Electric Holdings (TCEH), the holding company for its unregulated retail business, TXU Energy, and its unregulated merchant power unit, Luminant.

But talks have recently centered on how TCEH’s secured lenders would split the company’s equity after bankruptcy with unsecured bondholders at EFIH, the parent of EFH’s regulated power delivery business, Oncor. Oncor itself is ringfenced and is expected to escape bankruptcy.

As sides have remained at odds over the equity split, discussions have broadened to include alternatives to bridge the gap, including the CVR, said the people close to the matter.

Michael Erman and Nick Brown are reporters for Reuters News in New York