NEW YORK (Reuters) – Major bondholders of Energy Future Holdings have hired a law firm to help build support to rebuff a massive debt exchange by the company, sources close to the matter said on Tuesday.
Richard Hahn, an attorney with Debevoise and Plimpton LLP in New York, confirmed that his firm has been retained to represent bondholders, but declined further comment.
Large bondholders led by Franklin Templeton Investments are in a high-stakes battle to block the exchange, which could sharply damage the holdings of investors who do not participate if the debt swap goes through.
A Franklin Templeton spokesman declined comment.
A spokesman for Energy Future Holdings could not be reached for comment.
Formerly named TXU, Energy Future Holdings was loaded with debt when Kohlberg Kravis Roberts & Co, TPG Capital and Goldman Sachs Capital Partners took it private in 2007 in the largest leveraged buyout on record. The company has been burning cash since the power market worsened and a weak economy hurt demand.
The bondholder group has enough support to block a key part of Energy Future’s offer dealing with covenants, or terms of bondholder agreements. Covenant changes being sought by the company would allow it to sell its prized transmission business, Oncor, a source close to the matter said.
The major bondholders are now trying to persuade others not to participate in the debt exchange itself, the source said. Between 50 and 100 bondholders attended a conference call on Tuesday hosted by Debevoise and Plimpton, the source said.
Weighed down with about $43 billion in debt, Energy Future Holdings last week offered to swap some of its outstanding bonds for about $4 billion of new bonds in a bid to reduce debt by about $2 billion.
Bondholders are being offered between 46.5 and 74.5 cents on the dollar if they exchange their debt by an early tender deadline on Oct. 19.
The new notes would be secured, jumping ahead of older bonds that are not exchanged in claims on the company’s assets.
“If it does go through, they’re going to have a new class of bonds which have a higher priority than the existing bonds at the holding company,” said Timothy Doherty, analyst at KDP Investment Advisors.
“If you don’t participate, you could basically have up to $4 billion of new debt that’s sitting in front of you under a potential bankruptcy scenario,” he said.
Harm to the holdouts will be more limited, the fewer bondholders participate.
“It’s the ultimate prisoners’ dilemma,” Doherty said. “If bondholders act in unison, they would likely be better off but if they act in their self-interest…they could potentially be worse off.”
Moreover, the collateral behind the new bonds could be weakened anyway if Oncor were sold, analysts said.
Energy Future has declined to engage with bondholders, sources close to the deal said.
“There’s not a huge need for the company to do anything right now,” Doherty said. “They would like to complete the exchange, but bankruptcy isn’t imminent for them so it’s not something that has to be done immediately.”
(Reporting by Dena Aubin; Editing by Andrew Hay)