EFH restructuring talks expand, forge on ahead of looming payment

Reuters

By Nick Brown and Michael Erman

NEW YORK, Oct 24 (Reuters) - Energy Future Holdings hasstepped up talks with bondholders of its regulated unit, severalpeople close to the talks said on Thursday, as it holds out hopeof reaching the framework of a restructuring agreement before anexpected bankruptcy.

The Texas utility is seeking support for a deal proposed bybank lenders at its unregulated holding company to restructurethe bulk of its $40 billion in debt.

Within the last few weeks, it has ramped up efforts to getfirst- and second-lien bondholders of Energy Future IntermediateHoldings (EFIH), its regulated holding company, behind the dealas well, the people close to the talks said. They declined to benamed because talks are not public.

The first-lien bondholders are being advised by lawyers fromRopes & Gray and financial advisers from Capstone, said thepeople. Pimco and Blackrock are among the largest holders ofthose bonds.

The talks with the bondholders underscore the complexity ofEFH's capital structure and its efforts to achieve a path forits restructuring before it files for Chapter 11 bankruptcy.

The company will likely file for bankruptcy, according toanalysts and people familiar with the company's thinking, butwould prefer to garner as much support from creditors aspossible to facilitate a much easier and cheaper bankruptcy.

Time to reach such a framework is running out: EFH has about$270 million in interest payments due next Friday, Nov. 1, andany bankruptcy filing would have to come by then to avoid adefault.

While EFH could make the payment and extend the runway forrestructuring talks, people close to the matter told Reuters itis unlikely to do so.

BONDHOLDERS IN THE LOOP

EFH, formerly TXU Corp, was taken private in 2007 in a $45billion buyout, the largest-ever leveraged buyout. The dealsaddled the company with debt just before a sharp decline innatural gas prices and energy markets. The buyout consortiumincluded private equity firms KKR & Co LP, TPG CapitalManagement LP and Goldman Sachs Group Inc's private equity arm.

The first- and second-lien bondholders at EFIH wereinitially not a critical part of restructuring discussionsbecause they are considered in the money. But a restructuringplan put forth by the lenders, disclosed by the company in aSecurities & Exchange filing last week, carries implications fortheir payments.

While the economics of the plan could change, it purports togive the lenders all of the company's equity plus $8 billion intwo tranches of debt, with the buyout sponsors receiving $800million to be split with other creditor classes. The plan wouldforgo certain 'make-whole' payments that the EFIH first- andsecond-lien bondholders claim they are owed.

Make-whole payments are generally triggered when creditorsare repaid early to compensate them for the present value offoregone interest. The EFIH first-lien bondholders arenegotiating in hopes of enforcing the payment if the bonds arerefinanced, said two of the people close to the matter.

The likelihood of getting a deal done remains uncertain,with sides still far apart on key issues, the people said. And,to be sure, EFH does not need any creditor support to file forbankruptcy, though having it would reduce the uncertainty ofwhat would be a large and complex case.

Ideally, the company would also like the support of otherbondholders at EFIH. But holders of EFIH payment-in-kind notesalready walked away from talks, and the second-lien bondholdersare currently not restricted from trading, which limits thesubstance of any discussions they may have, according to two ofthe people close to the matter.

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