TEXT - Fitch takes rating actions on Energy Future Holdings Corp
Jan 30 - Fitch Ratings has lowered the Issuer Default Ratings (IDR) of Energy Future Holdings Corp (EFH) and Energy Future Intermediate Holding Company LLC (EFIH) to 'Restricted Default' (RD) from 'CCC' on the conclusion of the debt exchange and removed the Rating Watch Negative. On Dec. 21, 2012, EFIH had launched an offer to exchange up to approximately $1.3 billion of new 10.000% senior secured notes due 2020 for any and all outstanding EFH's $115 million 9.75% senior secured notes due 2019, EFH's $1,061 million 10.000% senior secured notes due 2020, and EFIH's $141 million 9.75% senior secured notes due 2019. The exchange offer concluded yesterday with approximately 99% of bondholders tendering their notes in the exchange. Fitch had deemed the exchange offer to be a distressed debt exchange (DDE) since the exchange offer would be accepted only if the tendering bondholders also consent to indenture amendments that materially impair the position of holders that do not tender. EFH has received the requisite consents to adopt the proposed indenture amendments. Fitch has downgraded the rating for the notes subject to DDE to 'CCC/RR1' from 'B/RR1' and removed the Rating Watch Negative. A second exchange offer has also concluded, whereby EFIH had offered to exchange up to approximately $124 million of its 11.25%/12.5% senior toggle notes due 2018 notes for the outstanding EFH's cash pay/toggle notes due 2017. Approximately $64 million of bondholders tendered their notes in the exchange. Fitch has simultaneously taken various rating actions based on the post-exchange capital structure and the fundamental outlook for EFH and EFIH. Fitch has upgraded the IDRs of EFH and EFIH to 'CCC' from 'RD', which is the same as the pre-exchange IDR. The first lien notes exchange, being a par exchange, has not changed the probability of default for the two companies. The unsecured notes exchange results in a small benefit to the combined liquidity given the three-year payment-in-kind feature on the newly issued notes. Fitch has simultaneously downgraded the ratings for the EFH's 9.75% notes due 2019 and 10.000% notes due 2020 that were not tendered in the exchange to 'CC/RR6' from 'CCC/RR1' due to a loss in both collateral coverage and upstream guarantee arrangements as a result of the indenture amendments. These notes are now pari passu with EFH's legacy notes. Fitch has also simultaneously upgraded the ratings of EFIH's 9.75% notes due 2019 that were not tendered in the exchange to 'CCC+/RR3' from 'CCC/RR1'. These notes are now pari passu with EFIH's senior toggle notes due 2018. SENSITIVITY/RATING DRIVERS The 'CCC' IDRs for EFH and EFIH reflect the highly leveraged capital structure, sufficient but declining liquidity, and currently constrained, but growing distributions and tax payments from Oncor Electric Delivery Company LLC (Oncor). Fitch expects dividend distributions and corporate tax payments as the only principal source of cash flows for EFH/EFIH going forward. Fitch expects EFH/EFIH's FFO to consolidated debt to be in a 4%-6% range and FFO to interest ratio to be 0.7x-0.8x over 2013 - 2018, which is indicative of a 'CCC' IDR. Fitch's financial forecasts assume no tax implications for EFH due to any potential restructuring activities at Texas Competitive Electric Holdings Company LLC (TCEH). Combined liquidity at EFH/EFIH stood at $1.41 billion as of Dec. 31, 2012, which includes the $680 million held in escrow to repay the remaining inter-company loans to TCEH. Looking forward, Fitch expects combined liquidity to be affected by reduced upstream dividend and cash tax payments from Oncor during 2013 - 2014 as a result of elevated capex and bonus depreciation benefits. Fitch expects liquidity to be adequate until 2016 given EFIH has capacity to issue an incremental $250 million in second lien debt and $400 million of unsecured debt based on current debt incurrence restrictions. Further liability management, refinancing of the current high cost debt, and/or equity infusion will be needed to right size the capital structure and support liquidity at EFH/EFIH, in Fitch's view. Fitch's assessment of the collateral valuation at EFH/ EFIH continues to depend solely on the value of Oncor Electric Delivery Holdings Company LLC's (Oncor Holdings) 80% ownership interest in Oncor. The recovery valuation for all classes of debt pursuant to the first lien debt exchange and unsecured notes exchange did not change, except for the untendered notes. Fitch's recovery analysis yields a 100% recovery for both the first lien and second lien debt. As a result, Fitch has notched up the ratings for the first and second lien debt by three notches to 'B/RR1'. Since the new notes issued in the unsecured notes exchange are pari passu to the notes being exchanged, there is no change in recovery ratings at that class of debt. There is also no change in recovery for EFH's legacy notes. WHAT COULD TRIGGER A RATING ACTION Change in Leverage at EFH/EFIH: Areduction in debt at EFH/EFIH will be positive for their credit profile. Any reduction in leverage through liability management activities will be evaluated by Fitch based on the terms of the transaction and could lead to changes in the recovery analysis. Lower Than Expected Cash Flows: A material shortfall in cash flows at EFH/EFIH versus Fitch's current expectations due to factors such as reduced dividends and/or corporate tax payments from Oncor, federal tax obligations triggered by a potential restructuring at TCEH among other factors could lead to a downgrade in the ratings of these entities. Change in Oncor's Valuation: Any change in Fitch's assessment of the valuation of Oncor due to reasons such as change in regulatory environment, any restriction placed on upstream dividend distribution, a change in electric sales outlook etc. could lead to a change in recovery ratings for EFH/EFIH's debt instruments. Fitch has taken the following rating actions: EFH -- IDR downgraded to 'RD' from 'CCC' and simultaneously upgraded to 'CCC'; -- 9.75% notes due 2019 downgraded to 'CCC/RR1' from 'B/RR1' and simultaneously downgraded to 'CC/RR6'; -- 10.000% notes due 2020 downgraded to 'CCC/RR1' from 'B/RR1' and simultaneously downgraded to 'CC/RR6'; -- Senior unsecured guaranteed notes affirmed at 'CCC+/RR3'; -- Senior unsecured non-guaranteed notes affirmed at 'CC/RR6'. EFIH -- IDR downgraded to 'RD' from 'CCC' and simultaneously upgraded to 'CCC'; -- 9.75% notes due 2019 downgraded to 'CCC/RR1' from 'B/RR1' and simultaneously upgraded to 'CCC+/RR3; -- Senior secured first lien debt not subject to DDE affirmed at 'B/RR1'; -- Senior secured second lien debt affirmed at 'B/RR1'; -- Senior toggle notes affirmed at 'CCC+/RR3'.