Energy Future interest payment buys time to restructure

• KKR, TPG, Goldman-backed company made $270M interest payment

• Restructuring talks expected to resume early next year

• Company that emerged from $45 billion buyout may still file for bankruptcy

The Texas power generator has been negotiating for months with creditors to restructure its $40 billion in debt ahead of an expected bankruptcy filing.

Nov 1 was expected to be a deadline in those talks, with senior lenders hoping the company would skip the payment to subordinated bondholders and file for Chapter 11 instead.

But the company made the payment on schedule, EFH spokesman Allan Koenig said, two days after a source close to the matter told Reuters the company was leaning toward paying it.

The company also said in a filing with the U.S. Securities & Exchange Commission that talks with creditors have for the time being broken off.

Lawyers and financial advisers representing the creditors are still engaged in negotiations with the company, and the company expects talks with creditors to resume, saying in the filing it would “continue to explore all available restructuring alternatives.”

Energy Future Holdings was created in October 2007 in a $45 billion buyout of Dallas-based TXU Corp, the biggest electricity-generating and distribution company in Texas.

The buyout, led by KKR & Co, TPG Capital Management LP and the private equity arm of Goldman Sachs, left the company with debt just as natural gas prices were about to plunge, making its coal-fired plants unprofitable.

The next interest payment to those bondholders is due in May. But the company likely must reach an agreement with creditors before then.

In the first quarter of next year, EFH expects to receive an opinion from auditors on whether it can survive as a going concern based upon its annual financial statements. It may have trouble convincing auditors to grant a positive opinion, given that $3.8 billion of bank debt matures in October 2014 and the company has only around $1.8 billion of cash. Failure to secure such an opinion would trigger a default of EFH’s $20 billion of bank debt, meaning lenders could push the company into bankruptcy.

That means restructuring talks will likely come to a head sometime in the first quarter of 2014, people close to the discussions told Reuters.

The Nov 1 interest payment to subordinated bondholders had surprised some creditors, who said EFH would not want to upset lenders of $20 billion in secured debt.

The lender group viewed the payment as money out of its own pocket because it would have had first claim on certain of the company’s assets in the event of a Chapter 11 filing, two people close to the matter told Reuters on Thursday.

The move may have put a chill in relations between the company and the lenders as restructuring talks carry on. The lenders, through sheer size of their claim, have more bargaining power than other creditors, which could make life difficult for the company if the lenders are dissatisfied with developments.

Friday’s filing with the SEC detailed a few different restructuring proposals advanced by the company and its creditors, all of which would have included a voluntary bankruptcy filing by EFH or its subsidiaries. While none were agreed to, they could form the basis of future discussions.

EFH’s plan, which would be funded by a $3.6 billion bankruptcy loan, would allow the buyout group to retain ownership of 4 percent of the company. The lenders would get the rest of the equity, along with $7 billion of debt split into two tranches.

Secured debt at Energy Future Intermediate Holdings (EFIH), a subsidiary that owns EFH’s regulated transmission and distribution business, would largely be refinanced into new bonds with lower coupons. The bondholders would also receive so-called make-whole payments to compensate for the value of foregone interest.

Another plan, put forward by the secured lenders, would give lenders all the equity, plus $8 billion in new debt, with any potential recovery for the buyout group to be determined. Classes of bondholders at EFIH would receive $225 million and $375 million in cash respectively.

While those plans would attempt to keep the company intact, a third proposal would separate the regulated transmission unit, EFIH, from the parent, handing its ownership instead to some of the unit’s unsecured bondholders and paying off more senior bondholders with proceeds from a new bankruptcy loan and a rights offering.

Nick Brown is a reporter for Reuters News in New York

Billy Cheung is a reporter for Thomson Reuters Loan Pricing Corp in New York