Many creditors and industry analysts had expected the company to skip the payment and file for bankruptcy to shield it from creditors while it restructured in court.
The decision to make the payment could be a crucial step in the odyssey of EFH’s path toward a restructuring. While it gives the company an extra six months to try to negotiate with creditors, it may also anger some of its more senior bank lenders who would have first claim on its remaining assets, several people close to the matter told Reuters.
The planned payment, first reported by the Wall Street Journal, would allow the company to avoid default, and could delay any bankruptcy filing by extending the time the company has to negotiate a restructuring with creditors. Its next interest payment on the bonds in question is not due until May.
The interest payment, owed to subordinated bondholders at EFH’s unregulated power generating unit, is a drop in the bucket in the context of EFH’s $40 billion debt load.
Still, paying it could chill restructuring talks with holders of $20 billion in first-lien bank debt, who would have first dibs on certain of the company’s assets in a bankruptcy and are not keen on seeing other creditors receive cash payouts, several people close to the talks told Reuters.
For that reason, many of the people believed the company would skip the payment. But EFH has consistently told creditors in restructuring talks it was keeping the payment option open, the people said.
EFH declined to comment on its plans.
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, saddled the company with debt just as natural gas prices were about to plunge, making the company’s coal-fired plants unprofitable.
The payment does not necessarily mean a bankruptcy won’t happen. The company could change its mind on making the payment. Or the company could reach a prearranged deal with its creditors that calls for it to file Chapter 11.
While the payment extends the runway for discussions by six months, a deal could be reached at any time. The decision to make the payment could mean the sides are close to a deal and wanted a few extra days to seal it. However, several sources familiar with the talks told Reuters that creditor factions are still far apart on the terms of a restructuring.
The linchpin in discussions centers on first- and second-lien bondholders at the company’s regulated power delivery subsidiary, Energy Future Intermediate Holdings, the people said. Those bondholders are demanding compensation for refinancing their bonds, which would likely take the form of new debt, since the company is not in a position to raise cash, two of the people said.
But the bank lenders, given the size and priority of their claims, have more leverage than other creditors. The gap between what the bondholders are demanding and what the lenders are willing to give had not been bridged by the evening of Oct 30, the people said.
Despite the lenders’ initial stance, some of the bondholders have become restricted from trading, meaning talks are alive and well, two of the people said.
It was unclear whether talks would die down if the interest payment was made.
About $29 billion of EFH’s total debt sits on its unregulated side, on the books of the holding company that owns the equity of its retail and power generation businesses. EFIH holds about $7.7 billion in debt, while the balance sits at the EFH parent.
Nick Brown is a reporter for Reuters News in New York