Target Of Largest LBO Gets Some Debt Relief

The company, formerly known as TXU Corp., arranged a private exchange this week with some lenders involving $1.6 billion in unsecured pre-LBO debt and senior unsecured LBO-related debt. Ratings agencies downgraded the company in return; Standard & Poor’s called the transaction “tantamount to a distressed debt exchange” and lowered its rating on the company to SD, symbolizing a selective default.

When TXU was taken private in October 2007 at the peak of the mid-decade buyout boom by DLJ Merchant Banking Partners, Texas Pacific Group Inc. and Kohlberg Kravis Roberts & Co., the $44.4 billion deal was the largest LBO ever undertaken, a distinction it still holds. Today, its lineup of backers includes KKR, TPG, Quintana Capital Group LP and AXA Private Equity SA.

But the company has struggled since the take-private, both as a result of the economic bust that followed the boom, depressing demand for its electricity and natural gas services, and also by the development of new technologies, such as the hydraulic fracturing of gasfield shales, that has driven down the prices that the company can charge its customers.

The company also carries a heavy debt load, more than $37.5 billion as of Sept. 30. It has lost $725 million through the first nine months, although that is an improvement from its $1.8 billion loss from the same period of 2011.

In the transaction undertaken this month, Energy Future Holdings exchanged that $1.6 billion of old holding company debt for about $1.15 billion in senior secured toggle notes due 2018 issued by a subsidiary, Energy Future Intermediate Holding Co. LLC, which controls the company’s regulated-electricity business. The new notes include a pay-in-kind feature enabling the company to make its semi-annual debt payments for the next three years not in cash but in additional PIKs. As S&P noted, another unit of the company, Texas Competitive Electric Holdings Co. LLC, which operates in unregulated electric markets, has $20 billion of debt coming due between 2014 and 2017.

“I would simply say that the debt exchange gives us financial flexibility,” Allan Koenig, a spokesman for Energy Future Holdings, said in an e-mail message.

As it turns out, the new notes, rated ’CC’ by S&P, actually got a better rating than the old debt, which was rated ’CCC’ by the agency. In S&P’s hierarchy, ’CC’ means “highly vulnerable,” while ’CCC’ means “vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.”

“Lenders accepting the exchange might be looking to the value, if any, of being closer to the asset that provides essentially all cash flow,” S&P said in announcing the rating action. The agency said it would revise the company’s rating from ’SD’ to its fundamental credit level later on.

Fitch cut Energy Future Holdings to ’Restricted Default’ from ’CC’ and said it considered “a material restructuring” of the capital structure at Texas Competitive Electric Holdings “highly likely” over the next 12 months.

Moody’s Investors Service revised its outlook on the company to developing from negative. The agency said it would revise its ratings later “to reflect the limited default that will have occurred and to consider our views that future restructuring activity is likely to continue.”

KKR and TPG declined  comment. Quintana and AXA did not immediately respond to requests for comment.