TXU Lenders Rebuff Chapter 11 Offer

  • Oaktree, Apollo among lender group
  • KKR, TPG among equity holders
  • Talks are off, but lines remain open

EFH said that discussions had ended for now, but in a candid disclosure also revealed that creditors were pushing for greater equity ownership and higher leverage on the company as part of any restructuring plan designed to avert a potentially complex and drawn-out Chapter 11 process.

The U.S. power giant has been struggling due to falling natural gas prices since its 2007 buyout by Kohlberg Kravis Roberts & Co., TPG Capital and GS Capital Partners LP, the private equity arm of Goldman Sachs Group Inc., which was backed by an historic $42 billion financing.

The rejected restructuring plan proposed giving first-lien lenders to merchant power subsidiary Texas Competitive Electric Holdings control of EFH and $5 billion of cash raised through new debt, in exchange for forgiving more than $20 billion of secured claims. EFH would also raise about $915 million of debtor-in-possession financing to bridge operations through bankruptcy and pay restructuring expenses at TCEH.

Projections by EFH showed subsidiary TCEH emerging from Chapter 11 by the end of the year with a $2 billion first-lien revolver, a $1 billion letter of credit facility and $5 billion of debt that could fund a cash payout to the current senior secured lenders. Equity owners KKR, TPG and Goldman Sachs would retain a 15 percent equity stake in EFH and senior secured lenders to its merchant power subsidiary would own the rest of the company.

TCEH’s unsecured bonds fell to around nine cents on the dollar in mid-April and second-lien bonds dipped to the mid-20s. Secured loans at the top of the capital structure held up in the mid-70s.

As well as pushing for more equity and higher leverage on the company, lenders were also worried about a forecast cashflow drain until 2017 generated by another subsidiary, Energy Future Intermediate Holdings. Since EFH has historically relied on funds from subsidiaries TCEH and EFIH to service debt, creditors are also looking for “a sustainable capital structure” for EFIH.

Analysts reduced the value of the initial proposal to senior secured lenders after the detailed company projections were released. RBC Capital Markets estimated that KKR, TPG and Goldman Sachs were offering 70 cents of value to TCEH’s senior secured creditors, while Cantor Fitzgerald calculated the recoveries implied by the rejected deal at 50 cents to 57 cents.

Despite stalled talks, creditors have directed their advisers, Millstein & Co. and Paul Weiss Rifkin Wharton & Garrison, to keep lines of communication open. Senior creditors have traded deal certainty for a messy bankruptcy, which could erode their collateral value. High bankruptcy fees, sustained low natural gas prices and tougher federal regulation on coal-fired power plants could all lower recovery.

Some conventional loan investors are not willing to wait for the outcome. CLOs, which buy nearly 50 percent of U.S. leveraged loans, hold only $2 billion (or about 10 percent) of TCEH’s outstanding bank debt. Most of the paper is currently held by big, aggressive distressed investors that are willing to lock horns with the embattled Texas utility.

Billy Cheung is a senior correspondent for Reuters LPC in New York.