NEW YORK, Sept 6 (IFR) - Interest in purchasing credit
protection has resurfaced in Energy Future Holdings Co after
another rating agency recently underscored the plausibility it
may be headed toward a credit event sooner, rather than later.
Moody's late August downgraded Energy Future Intermediate
Holding and its ultimate parent company, Energy Future Holdings
Corp to Caa1 from B3 citing "the likelihood EFIH will be
affected by the restructuring contagion at Energy Future
Competitive Holdings Co and despite attempts to disentangle the
EFH, a Texas power company, is considered a volatile name in
CDS. Its subsidiary, Texas Competitive Electric Holdings Co is a
constituent of the CDX.HY index. Its spreads are also highly
distressed. The latter's CDS has sharply widened in the wake of
It was the second time this year Moody's downgraded the two
entities and as a result, based on recent disclosures, Moody's
thinks EFIH and ultimate parent holding company, Energy Future
Holdings Corp are likely to be included in any bankruptcy
restructuring events, which could come as soon as the next
Fitch has also downgraded the entities twice in the last
eight months. In its latest ratings action, EFH and EFIH were
lowered to CC from CCC. Fitch cited the potential for a
voluntary Chapter 11 filing by some or all of EFH's
subsidiaries, except the ring-fenced Oncor Electric Delivery, as
per the company's 10-Q regulatory filings from August 2.
In that filing, EFH said its liquidity was USD1.7bn versus
USD3bn for the comparable year ago period.
EXCHANGES BIDE TIME
Since 2009, EFH and its subsidiaries have attempted to
meaningfully reduce its significant debt load brought on by its
LBO in 2007. The efforts are aimed at extending maturities via a
liability management program.
Earlier this year, EFIH exchanged USD1.3bln of new 10.00%
senior secured notes due 2020 for various senior secured EFH
notes maturing 2019-2020.
The exchanges had a substantial tightening effect on EFH's
spreads during that time frame as roughly 99% of the bonds were
tendered. The market has a built in expectation there would be
further debt exchanges to extend maturities and buy more time.
Since 2007, EFH has completed seven distressed exchanges.
Despite these efforts, out of all the CDX.HY20 names, EFH
subsidiary Texas Competitive Electric Holdings is the worst of
all the underperformers.
Its CDS credit curves are heavily inverted in the short- and
intermediate-term and have been for a prolonged period.
Aside from the distressed nature of the company, reflected
in its CDS, there are growing expectations the entity will not
able to make its forthcoming November bond coupon payments as
emphasized by Moody's as well as market opinion.
While the inversion of the CDS credit curve takes this event
risk into account, it can also reflect what bond investors are
beginning to think of recovery in case of default.
When looking at the yield-to-maturity on the 6.55% due
November 15 2034, it is 12.955%. It is equal to the current
yield of the bond at 12.955% which is priced at USD54.
The price of the bond at USD54.00 has declined from USD73.50
in early June. In some cases, when CDS credit curves are heavily
inverted the yield-to-maturity can become skewed and an investor
would look at the price of the bond.
For the time being, it appears that the bond investor has a
more resilient opinion of the company, since the bond is priced
below par, but the yield-to-maturity and yield are 12.955% which
remain higher than the coupon rate of 6.55%. It is worth noting,
the yield-to-maturity is currently at a three-month high.
However, the synthetic market is less optimistic on the
overall company's future.
TXU's CDS in the five-year maturity is currently trading at
roughly 92 points upfront. If an investor were to buy protection
on a bond, for example, a USD100 bond, you would pay a USD92
premium upfront, which is implied in the pricing by the CDS
market of a 92% haircut on the bond.
Meanwhile, TXU parent, EFH's CDS is quoted at 56 points
upfront, which is indicative of a 56% haircut on the
hypothetical bond in the example.