UPDATE 2-RLPC-Energy Future lines up jumbo bankruptcy loan as creditor talks go on

Thu Mar 27, 2014 11:58am EDT

* Energy Future Holdings close to finalising DIP financing

* Biggest-ever privately-funded bankruptcy financing

* At least six banks lining up to arrange loan (Adds details of creditor negotiations throughout)

By Billy Cheung and Nick Brown

NEW YORK, March 27 (Reuters) - With an expected bankruptcy filing drawing near, embattled Texas utility Energy Future Holdings is putting the finishing touches on one of the largest bankruptcy loans in history, while at the same time hoping it can reach last-minute agreements with creditors to make its Chapter 11 smoother.

Energy Future is negotiating a deal with several banks for at least $9 billion in a pair of bankruptcy loans, an increase from previous discussions in which the figure was pegged at around $8 billion, sources involved in the matter said on Thursday.

The so-called Debtor-In-Possession, or DIP, loan is in the final stages of negotiation, said the people, who declined to be named because talks are private.

Credit agreements have yet to be signed, but the deal is expected to be the largest-ever privately funded bankruptcy financing, according to Thomson Reuters LPC data.

At least six banks, including Citigroup and Morgan Stanley, are lining up to provide pieces of the financing, two sources said.

Meanwhile, the company is talking to creditors about a partly prearranged restructuring that could make its trip through Chapter 11 smoother, quicker and less expensive, said two people close to the matter.

Energy Future was expected to file for bankruptcy at the end of the month. While that still may happen, the company is considering extending talks if it believes it could get creditors on board with a restructuring that would save years of costly fighting in court, the people said.

ELEVENTH-HOUR TALKS

Formerly known as TXU, Energy Future was taken private in October 2007 in the largest leveraged buyout ever, and has struggled to manage its debt of more than $40 billion ever since.

The sponsors of the buyout, who include KKR, TPG, Goldman Sachs and others, are expected to recover very little, if any, of their roughly $8 billion investment.

Energy Future Holdings is expected to reveal in an annual report that it did not receive an auditor's opinion that it could survive as a going concern, which would trigger a default on loans and push the company into Chapter 11.

While it had been expected to file the report at the end of March, it may extend that deadline if it believes it can achieve a deal with creditors to avoid a massive and potentially unpayable tax liability, one of the people said.

Lenders of Energy Future's unregulated merchant power unit, who hold more than $20 billion of the company's total debt, favor a breakup of the company that could earn them huge tax savings, but create a capital gains tax liability for Energy Future -- estimated by people close to the matter at between $5 billion and $8 billion -- which would likely never be fully paid to the government.

The lenders include private equity firms Apollo, Oaktree, Centerbridge and others.

Most other creditors, along with the equity holders, oppose that move. The company believes it may be able to work with other creditors to pressure the lenders to back off from that scenario and instead support a tax-free spinoff, in which case it could extend the filing of its report, said the people.

Bondholder groups at Energy Future Intermediate Holdings, the subsidiary that owns most of Energy Future's regulated business, are also gearing up for a fight over payments contractually owed to certain of the bondholders whose debt is secured.

The so-called "make-whole" payments are intended to compensate the bondholders for the present value of their coupons if their bonds are refinanced. Unsecured bondholders are challenging the validity of such payments.

LARGEST PRIVATE DIP

But there is no guarantee a deal will get done. Some ideas have already been shot down, including a proposal that the sides agree to hold a trial to determine the company's valuation, one of the people said. And Energy Future is continuing to negotiate big loans in anticipation of a long-term bankruptcy.

The proposed financing would consist of two DIP loans: one at the power merchant, Texas Competitive Electric Holdings (TCEH), worth between $4 billion and $5 billion, according to one of the people close to the matter; and another worth nearly $5 billion at EFIH, two of the people said.

The final amounts could still change as negotiations go on, the people said.

Citigroup and Morgan Stanley declined to comment. Allan Koenig, a spokesman for Energy Future, told Reuters the company has "not finalized or announced any debtor-in-possession as of now."

Proceeds from EFIH's DIP loan are expected to refinance $4 billion of first-lien notes at that subsidiary, finance interest payments for the second-lien bonds in bankruptcy, and provide a cash cushion for bankruptcy administrative expenses, one of the sources said.

That DIP will not be drawn in full at the outset of the Chapter 11 case, as interest payments on second-lien bonds will be made on its normal coupon schedule, subject to bankruptcy court approval of these adequate protection payments, the first source said.

The more than $9 billion in total financing is bigger than the $8.04 billion DIP for privately-owned petrochemical manufacturer LyondellBasell LYB.N in early 2009, LPC data shows.

It is eclipsed only by General Motors GM.N $33 billion DIP loan, which was advanced by the United States Treasury in June 2009.

The size of the loan matches the scale and complexity of Energy Future's business. The company has been in restructuring talks with creditors for more than a year, and could now be in for years of expensive court-supervised negotiations with different creditor groups.

"Energy Future's businesses are likely to be split and transferred to different creditor factions, which would help explain the reasoning behind separate DIPs at the regulated and unregulated businesses," said Andrew Devries, a fixed income utilities analyst at CreditSights. (Editing by Tessa Walsh in London and Michelle Sierra in New York)

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