Energy Future Debt Swap Gets Few Takers

NEW YORK (Reuters) – Energy Future Holdings has extended the deadline on a massive debt exchange after getting just a fraction of the participation it had sought, the company said in a statement on Friday.

Bondholders have offered to swap just $351 million of debt as of Thursday, out of $12.15 billion that was eligible for exchange. The deadline has been extended to Nov. 10 from Nov. 3, the company said.

Formerly known as TXU, Energy Future has been trying to restructure some of its $43 billion debt load, much of it taken on for its 2007 leveraged buyout by Kohlberg Kravis Roberts & Co and TPG Capital — the largest LBO ever.

The small participation was a major victory for bondholders, including Franklin Templeton Investors, who had organized to block the exchange after being offered as little as 46.5 cents on the dollar to swap their debt.

Bondholders believed the discounts were too steep now that the bond markets have recovered from a selloff earlier this year, a source close to the group said. Energy Future is also expected to report strong earnings on Oct. 30, potentially lifting the value of its bonds, the source said.

While the debt swap is hanging over the market, however, bonds may not trade much higher, the source added.

Energy Future was hoping to reduce its debt load by about $2 billion by swapping $6 billion of outstanding notes for $4 billion of new notes. The company on Friday said it was reducing the maximum amount of new notes to be exchanged to $3 billion.

In addition to the bond discounts, bondholders were opposed to amendments to bond terms Energy Future was seeking as part of the exchange. The changes to terms or covenants would have made it easier for Energy Future to sell its valuable transmission business, Oncor, a person close to the deal said.

Energy Future also on Friday eliminated an early tender deadline and said that all bondholders who swap debt by Nov. 10 will get the same terms. All bondholders are being offered between 46.5 cents and 74.5 cents on the dollar to exchange their debt.

“Bondholders think that they can do better,” said Timothy Doherty, an analyst for high-yield research firm KDP Investment Advisors.

The new notes being offered would have given bondholders an improved claim on Oncor assets, but bondholders worried that their security would be weak. Covenants would have allowed Oncor to be sold and the bonds transferred to a different company, analysts said.

Analysts also said the debt exchange would have done little to head off Energy Future’s major debt problem, a looming $23 billion maturing in 2014.

Carl Blake, analyst at independent research firm Gimme Credit, said in a report earlier this month the exchange would have trimmed its total debt by less than 3.5 percent, at best.

“Energy Future Holdings is suffering under the weight of an untenable debt load created by an ill-timed leveraged buyout at the top of the market,” Blake said. The debt swap was likely the first step in a multistage restructuring of the company’s capital structure, he added.

By Dena Aubin