US CREDIT-Energy Future exchange one of many steps needed

By Karen Brettell

NEW YORK, Oct 7 (Reuters) - Energy Future Holdings Corp's
proposed debt exchange is likely to be followed by additional
debt restructurings and possible asset sales as the company
grapples with reducing a suffocating $43 billion debt load.

The privately-held company on Monday said it was offering
to exchange up to $4 billion of new notes for outstanding debt,
which if successful will reduce its debt by up to $2 billion.
For details, see [ID:nN05293389]

The potential debt reduction, though a positive, would only
be a drop in the ocean in tackling its debt burden, which
includes $22 billion in bank debt that matures in 2014.

"They are incrementally addressing the issue, there will be
a series of transactions that will need to take place in order
for the company to do that," said Carl Blake, analyst at credit
research firm Gimme Credit.

"We could see some asset sales or additional debt exchanges
to address the bank debt," he said.

Energy Future Holdings spokeswoman Lisa Singleton said the
company will continue to look for opportunities to delever and
improve its balance sheet, but declined further details.

The energy company, formerly known as TXU Corp, is
suffering from its heavy debt load after being take private by
Kohlberg Kravis Roberts & Co KKR.UL and Texas Pacific Group
TPG.UL, which added around $24 billion in debt to fund the
purchase in 2007.

As part of the exchange, Energy Future Holdings is asking
holders of the company's legacy debt for amendments to debt
covenants, which if approved would give the company additional
flexibility for further restructurings.

"The covenant change is critical to the whole thing; it's
important to give them the added flexibility," said Blake.

The proposed covenant changes include removing restrictions
relating to new issuance of secured debt and modifying terms
relating to mergers and consolidations.

Some of the changes may be designed to give the company
room to sell its Oncor unit, considered the crown jewel of the
company's assets, so long as proceeds are posted as collateral
to back the debt, analysts at CreditSights said in a report.

As part of its buyout, KKR agreed to ring-fence Oncor,
Texas' largest regulated electric delivery company, and retain
the majority of the business for at least five years,
CreditSights said.

They added, however, "we think TXU might seek to sell
sooner," especially because Oncor has said it will not be able
to pay up cash to Energy Future Holdings in 2011 and 2012 due
to high capital expenditures.

For holders of the bonds targeted in the company's current
exchange, the decision over whether or not to participate will
be complicated by uncertainties around the impact of any
further restructurings on their debt.

Investors who do not tender their notes would end up
ranking behind the new noteholders in claims on the company's
assets.

"It's a complicated situation for bondholders. You know
that there's going to be more restructuring activity down the
road and the question is are you going to put yourself in a
situation that is going to be advantageous as future
restructuring activity takes place," said Gimme Credit's
Blake.