EFH payment gives little recourse to frustrated creditors

Reuters

By Nick Brown

Oct 31 (Reuters) - Senior lenders to Energy Future Holdingsare upset that the company plans to make a critical interestpayment to junior bondholders on Friday, but they likely have nolegal recourse to prevent it, according to experts and peopleclose to the matter.

The lenders, who hold about $20 billion in secured bankdebt, had hoped EFH would skip the $270 million interest paymentto the bondholders and instead file for bankruptcy torestructure its $40 billion debt load.

A bankruptcy would have given the senior lenders - whichinclude Apollo Global Management, Oaktree Capital Management andCenterbridge Partners, among others - first claim on the moneybeing paid to the bondholders.

But aside from trying to flex their muscles in futurenegotiations, there is not much the lenders can do to hit back.Pushing EFH into an involuntary bankruptcy is likely impossibleat present, and filing a lawsuit to claw the money back would bedifficult, according to experts and people close to the talkswho declined to be named because discussions are private.

The company is preparing a U.S. Securities and ExchangeCommission filing as soon as Friday, detailing the latest onrestructuring talks with creditors, according to a third personfamiliar with the matter.

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

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

EFH is widely expected to file for bankruptcy eventually andhas been negotiating with creditors in hopes of having theframework of an agreement in place before filing, saving it timeand the cost of a lengthy spell in Chapter 11.

The next interest payment to the bondholders in questionfalls due in May, but the company may have to act before then.

In the first quarter of next year, EFH expects to receive anopinion from auditors on whether it can survive as a goingconcern based upon its annual financial statements. It may havetrouble convincing auditors to grant a positive opinion, giventhat $3.8 billion of bank debt matures in October 2014 and thecompany has only around $1.5 billion of cash. Failure to securesuch an opinion would trigger a default of EFH's $20 billion ofbank debt, meaning lenders could push the company intobankruptcy.

That means restructuring efforts are likely to come to ahead sometime in the first quarter of 2014, the people close tothe matter said.

TO PAY OR NOT TO PAY

Friday's interest payment date had been viewed by creditorsas a deadline for EFH's efforts toward a consensualrestructuring, and the company had been expected to skip the$270 million payment and file for bankruptcy regardless ofwhether it had the framework of a deal.

But Reuters reported on Wednesday that EFH was leaningtoward making the payment and avoiding a default, which woulddelay any expected bankruptcy filing.

The senior lenders view the payment to subordinatedbondholders as money out of their own pockets, because theywould have had first claim on certain of the company's assets inthe event of a Chapter 11 filing, said the two people close tothe matter.

The move may chill relations between the company and thelenders as restructuring talks carry on. The lenders, throughsheer size of their claim, have more bargaining power than othercreditors, which could make life difficult for the company ifthe lenders are dissatisfied with developments.

"If this undermines the lenders' faith in management, thatmight well outweigh any benefit of delaying the bankruptcy,"Stephen Lubben, a bankruptcy expert and professor at Seton HallUniversity School of Law, told Reuters.

But from a legal standpoint, EFH is probably safe frombacklash. While the lenders could sue to try to recover themoney as a so-called fraudulent transfer, they would have toprove that the payment was made to injure them, and that itrendered EFH insolvent - a difficult prospect, said the twopeople familiar with negotiations.

Besides, Lubben said, "paying a debt that is actually due,according to its terms, is not a fraudulent transfer" underbankruptcy laws.

Likewise, the lenders would be hard-pressed to force EFHinto an involuntary bankruptcy to avoid the payment, said JohnPenn, a bankruptcy lawyer at Perkins Coie in Texas.

Under bankruptcy laws, creditors who want to force debtorsinto bankruptcy must prove that the debtor is generally notmaking its interest payments as they come due.

"You can't prevail in an involuntary petition unless youshow that a debtor is not paying debts," Penn told Reuters."It's not just a balance sheet test."

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