Energy Future interest payment buys time to restructure

Reuters

By Nick Brown and Bill Cheung

NEW YORK, Nov 1 (Reuters) - Energy Future Holdings made aninterest payment of about $270 million to subordinatedbondholders on Friday, setting the stage for a few more monthsof restructuring talks that are likely to come to a head earlynext year.

The Texas power generator has been negotiating for monthswith creditors to restructure its $40 billion in debt ahead ofan expected bankruptcy filing.

Friday was expected to be a deadline in those talks, withsenior lenders hoping the company would skip the payment tosubordinated bondholders and file for Chapter 11 instead.

But the company made the payment on schedule, EFH spokesmanAllan Koenig said, two days after a source close to the mattertold 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 timebeing broken off.

Lawyers and financial advisers representing the creditorsare still engaged in negotiations with the company, and thecompany expects talks with creditors to resume, saying in thefiling it would "continue to explore all available restructuringalternatives."

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,left the company with debt just as natural gas prices were aboutto plunge, making its coal-fired plants unprofitable.

The next interest payment to those bondholders is due inMay. But the company likely must reach an agreement withcreditors 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 $1.8 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 talks will likely come to a headsometime in the first quarter of 2014, people close to thediscussions told Reuters.

Friday's interest payment to subordinated bondholders hadsurprised some creditors, who said EFH would not want to upsetlenders of $20 billion in secured debt.

The lender group viewed the payment as money out of its ownpocket because it would have had first claim on certain of thecompany's assets in the event of a Chapter 11 filing, two peopleclose to the matter told Reuters on Thursday.

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

COMPETING PROPOSALS

Friday's filing with the SEC detailed a few differentrestructuring proposals advanced by the company and itscreditors, all of which would have included a voluntarybankruptcy filing by EFH or its subsidiaries. While none wereagreed to, they could form the basis of future discussions.

EFH's plan, which would be funded by a $3.6 billionbankruptcy loan, would allow the buyout group to retainownership of 4 percent of the company. The lenders would get therest of the equity, along with $7 billion of debt split into twotranches.

Secured debt at Energy Future Intermediate Holdings (EFIH),a subsidiary that owns EFH's regulated transmission anddistribution business, would largely be refinanced into newbonds with lower coupons. The bondholders would also receiveso-called make-whole payments to compensate for the value offoregone interest.

Another plan, put forward by the secured lenders, would givelenders all the equity, plus $8 billion in new debt, with anypotential 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 ofthe unit's unsecured bondholders and paying off more seniorbondholders with proceeds from a new bankruptcy loan and arights offering.

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