Situation Deteriorates For Target Of Largest LBO

Things are going from bad to worse for the largest buyout in history.

Key bondholders are holding up a debt exchange that would seek to alleviate pressure from the massive debt burden on Energy Future Holdings Corp., the Dallas-based energy company that Kohlberg Kravis Roberts & Co., TPG and GS Capital Partners bought in 2007 for $44.3 billion.

Franklin Templeton Investments and other major bondholders holding more than 50 percent of the company’s bonds have banded together to oppose the exchange deal, according to an Oct. 9 report by Thomson Reuters, publisher of Buyouts. The company is trying to swap about $4 billion of new debt for outstanding notes, which would reduce its $44 billion debt load by $2 billion.

News of the sputtering debt exchange comes after two major ratings agencies downgraded the company in anticipation of the exchange. Standard & Poor’s Ratings Services on Oct. 5 lowered its corporate credit ratings on the company to ‘CC’ from ‘B-.’ That same day Moody’s Investors Service downgraded the probability of default rating on the company to Ca from Caa1, downgraded its long-term debt ratings for selected securities, and placed the ratings for some securities held by its subsidiary, Texas Competitive Electric Holdings, on review for a possible downgrade. “We view this exchange offer as distressed and thus equivalent to a default based on our ratings criteria,” wrote S&P Analysts Terry Pratt and Aneesh Prabhu.

Energy Future Holdings has fallen into a downward spiral since KKR, TPG and Goldman Sachs bought it at what turned out to be the top of the buyout market. The company’s total debt-to-EBITDA ratio was 8:1 upon completion of the deal, with an interest coverage ratio of 2:1, according to Thomson Reuters LPC.

Since the LBO, the company has struggled to pay its debt as the market for power worsened and a slumping economy impaired demand. For the second quarter of 2009, the company formerly known as TXU reported a 23 percent year-over-year decline in operating revenue to $2.3 billion and a consolidated net loss of $155 million, as previously reported in Buyouts. The company holds a staggering $44 billion in debt, or $42 billion if the company pulls off the debt exchange.

Moody’s said it continues to believe the company’s long-term fundamentals are weak, pointing to the magnitude of its debt; significant maturities in 2014; the current and long-term prospects for the financial and credit markets; and a noticeable acceleration of environmentally sensitive legislative initiatives that could hurt its business, among other concerns. “The negative outlook reflects our concerns regarding the long-term sustainability of [Energy Future Holdings’s] business model and its untenable capital structure,” the Moody’s report said.

Officials at Energy Future Holdings were not immediately available for comment.