Moody’s Sees Bankruptcy In ’13 For Biggest Buyout

Moody’s said it considers the outlook most likely that the non-regulated Texas Competitive Electric Holdings and its intermediate subsidiary holding company Energy Future Competitive Holdings will file for bankruptcy. Those financially distressed units have roughly $30 billion in debt but only $15 billion in perceived value, Moody’s said. Holders of the units’ secured debt could expect losses of roughly 50 percent, while unscecured creditors “would be pretty much wiped out,” Moody’s said.

It is also probable that Energy Future Holdings, the parent company, along with a subordinate holding company, Energy Future Intermediate Holdings, also will file for bankruptcy, which would add roughly $8.3 billion to the bankruptcy, Moody’s said, adding that the recovery profile would be similar.

A filing by the parent company would likely eliminate any recovery for the equity investors who backed the $45 billion buyout of the company formerly known as TXU in history’s largest buyout deal in October 2007, a transaction spearheaded by Kohlberg Kravis Roberts & Co, TPG Capital and Goldman Sachs Group Inc’s private equity arm, GS Capital Partners.

KKR and the company declined to comment, while the other financial sponsors did not respond by deadline to requests for comment.

“Regardless of which entities file, we think the restructuring will be relatively amenable and organized,” said Jim Hempstead, an associate managing director at Moody’s, in the press release accompanying the report.

A bankruptcy by Energy Future Holdings could be one of the 10 largest non-financial corporate filings in the United States since 1980, Moody’s said. Counting the parent, a filing could include $39.7 billion in assets and be the fourth largest, ranking ahead of Chrysler LLC’s $39.3 billion collapse in 2009. If the filing included only the Texas Competitive subsidiaries, a filing would rank seventh, ahead of Global Crossing Ltd, a $30.2 billion bankruptcy from 2002.

At the time of the deal, the sponsors touted the environmental benefits of the transaction, as the Texas electric and gas utility agreed to forego construction of a series of coal-fired power plants and to more than double its purchases of wind-generated electric power. But with energy demand subdued in the wake of the Great Recession and with the price of natural gas pushed down by new drilling technologies, Energy Future Holdings found itself in a financial hole from which it has been unable to emerge.

Energy Future Holdings proposed a plan in April to restructure $32 billion of its debt through a prepackaged bankruptcy, but senior secured lenders including Oaktree Capital Management and Apollo Global Investors have rejected the initial plan, as sister service Thomson Reuters Loan Pricing Corp. reported at the time. As part of the proposal, the financial sponsors offered to contribute new equity capital to facilitate a deal, provided that the sponsors would receive additional equity stakes in the company, Energy Future Holdings said in its quarterly report in August. Creditors still have not agreed to any changes in the company’s capital structure.

In the meantime, the sponsors have written down their investments significantly. KKR, the only one of the three primary backers to disclose its marks publicly, valued Energy Future Holdings at $10 million as of June 30, a fraction of the $200 million of equity that it put into the deal, according to the firm’s July 26 financial report.

Moody’s said it saw little impact on collateralized debt obligations that carry Energy Future Holdings bonds in their portfolios. KKR holds more than $300 million of principal amount of Texas Competitive’s senior secured first-lien loans in four CLOs, Moody’s said.

Under no scenario would Oncor, the regulated utility in the Energy Future family, or its holding company, Oncor Electric Delivery Holdings, file for bankruptcy, Moody’s said.