Creditors balk at bankruptcy loan teeing up Energy Future sale

June 25 Wed Jun 25, 2014 5:38pm EDT

June 25 (Reuters) - Bankrupt Energy Future Holdings' novel plan to sell itself through a loan provision has Texas's largest power company in hot water with creditors, who accuse it of trying to skirt a public sale process and hiding its true value.

The company and its creditors are heading for a courtroom showdown on Monday when Energy Future will seek a judge's approval to take on a $2 billion loan that would give a group of hedge fund lenders 60 percent of the company when it emerges from its $48 billion bankruptcy.

Other creditors have cried foul, saying Energy Future hasn't considered competing offers and is selling itself without a traditional court-supervised bankruptcy auction. Creditors have estimated Energy Future has a total enterprise value, which includes debt, of $21 billion thanks to its EFIH unit, which owns Texas's biggest power lines operator, Oncor.

The fight centers on EFIH's plan for a debtor-in-possession, or DIP, loan that would refinance high-yielding notes.

DIP loans are meant to sustain a bankrupt business during a reorganization, although lenders often use the loans to control the case. Converting the loan into an ownership stake is unusual, according to legal experts.

The company's legal team has said it spent a year negotiating with creditors prior to the April bankruptcy and the loan proposal was the best deal on the table.

In recent weeks two groups of creditors have offered their own converting DIP loans that they say offer better terms. One group teamed up with NextEra Energy Inc, the biggest producer of wind power in Texas, which would contribute $1.6 billion to the loan, according to court documents. NextEra declined to comment.

"The debtors are selling their equity without having conducted any formal sale process or performed any formal valuation to determine if the proposed equity investment is on reasonable terms," wrote James Peck, a lawyer for the official committee of unsecured creditors, in a Tuesday objection to the proposed loan. He called the loan "unprecedented."

The U.S. Supreme Court has said bankrupt companies must sell assets in a way that is fair and transparent, said Stephen Selbst, a bankruptcy attorney with Herrick, Feinstein in New York who is not involved in the case. "People keep trying to find ways around that."

Energy Future can consider alternate transactions, but creditors said once the loan is approved restrictive provisions will deter any potential bidders.

John Penn, a bankruptcy attorney at Perkins Coie in Dallas, who is not involved in the case, said the judge has flexibility to decide what to with the assets if he rejects the company proposal on Monday.

"Sometimes it becomes a formalized process with bid procedures and other times you just have the competing parties show up in court with their offers and each makes their pitch," said Penn.

Separately, Energy Future is spinning off its TXU Energy retail utility and Luminant power generating business to the unit's secured lenders. (Reporting by Tom Hals in Wilmington, Delaware; Editing by Leslie Adler)

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