* Any bankruptcy seen several months away -sources
* Law firms, creditors start to group as company hires
* Power company may try to stay out of bankruptcy court
* TXU could try to keep regulated unit out of court
By Nick Brown and Michael Erman
Feb 15 Energy Future Holdings has enough money
to pay its debts for at least the next year, but lawyers and
bankers are betting a big chunk of the Texas power company will
file for bankruptcy, and are already trying to line up clients
to represent in any restructuring.
Energy Future - formerly TXU - set the wheels in motion last
week when it tapped restructuring advisers from law firm
Kirkland & Ellis and financial advisers Evercore Partners
and the Blackstone Group.
The hiring of advisers came just months before the company,
which was taken private in 2007 in the largest leveraged buyout,
has to start making payments on some of the $52 billion of debt
it had as of the end of September.
Now, creditors have begun to organize themselves for a
restructuring and a plethora of large law firms, including
Cadwalader Wickersham & Taft, Brown Rudnick, Otterbourg
Steindler Houston & Rosen, and White & Case, are involved or
making pitches to represent creditor groups, people close to the
With more than $42 billion in assets, Energy Future has the
potential to be one of the 10 largest U.S. bankruptcies, and the
largest since specialty finance company CIT Group Inc
filed for protection in late 2009, according to
Law firms and investment banks can make millions of dollars
from large bankruptcies, depending on the size and complexity of
the case. Some leading bankruptcy partners charge around $1,000
an hour, and lead teams of dozens of partners and associates
whose hourly rates vary from about $300 to about $800.
Energy Future and its advisers declined to comment on the
matter. White & Case declined to comment.
The $45 billion TXU buyout, which loaded the company with
debt, is viewed as one of the most spectacular failures of the
last decade's buyout boom. KKR & Co, one of the private
equity firms that led the TXU deal, has written off 95 percent
of the value of its investment in the company. TPG Capital
Management and Goldman Sachs Group Inc's private
equity arm were also part of the consortium.
The debt is held by scores of parties, including distressed
debt investors Aurelius Capital Management, Centerbridge
Partners and Angelo Gordon & Co, one of the sources said.
KKR and TPG declined to comment. Goldman was not available
for comment. The distressed investors and other law firms could
not immediately be reached for comment.
Also at stake is the future of the power market in Texas.
Energy Holdings is the largest power generator in the state
and has three units. The merchant power unit Luminant, which
owns more than 15,000 megawatts of nuclear, coal and gas-fired
power plants, and its retail business TXU Energy are
unregulated, while the power delivery business Oncor is
Depending on how the restructuring plays out, it could add
turmoil to the electric market in Texas, where new generating
capacity is not keeping pace with demand for power.
Restructuring experts and people close to the case expect
Energy Future will eventually try to put its struggling
unregulated power businesses into bankruptcy, while attempting
to keep the parent company and Oncor out of bankruptcy.
But these people also said the company has enough liquidity
to see it into late 2014, and may wait as long as possible
before raising the white flag.
"I don't think (a bankruptcy) is imminent," said Bill
Brandt, a turnaround specialist at Development Specialists Inc
who has followed the case but is not involved. "They've got some
issues to straighten out first."
Energy Future has been trying to buy itself time.
In January, it extended the maturity date of a $16.5 billion
term loan to 2017 from 2014. It has also exchanged debt on which
it owed cash payments, for debt on which interest payments could
The company also has around $2.7 billion in liquidity -
plenty for it to survive on, at least until a $3.85 billion bank
loan matures in October 2014, a U.S. regulatory filing from last
The company may also wish to avoid a filing altogether, as
potential ramifications could include investigations both within
the bankruptcy process and by Texas politicians or regulators,
said one person close to the matter.
But most analysts and investors believe these scenarios are
The TXU takeover was built on hopes that natural gas prices
would stay high. Instead, they have dropped sharply with
benchmark U.S. prices falling about 56 percent to around $3.29
per million British thermal units now from around $7.50 per
mmBtu in February 2007.
Prices for the fuel are not expected to top $4 this year,
natural gas futures indicate.
As Energy Future restructures, a central question is which
of its entities will be forced to file for bankruptcy and which
will stay out.
The company has ring-fenced its healthiest entity, power
distributor Oncor, by making sure all creditor claims and
liabilities are at other entities.
By all accounts, the ring-fence is "solid," said Fitch
Ratings Analyst Shalini Mahajan. "We do not think that Oncor's
assets are going to get pulled in."
Fitch has delinked ratings for the parent company, Energy
Future Holdings (EFH), from its unregulated units.
Oncor has tapped financial adviser Miller Buckfire, one of
the sources said.
Still, creditors may try to drag Oncor into Chapter 11. EFH,
itself, has about $6 billion of bond debt, some of which is
secured by equity in Oncor. This equity could be worth about
$7.7 billion, according to a recent CreditSights research note.
Creditors may work to keep Oncor as part of EFH's estate to
avoid the risk that it is sold before the rest of the company
files for bankruptcy, one source said.
CreditSights estimated recovery for secured lenders and
bondholders at about 77 cents on the dollar, based on forecasts
of about $2 billion in earnings before interest, taxes,
depreciation and amortization.
According to a forecast by one sell-side analyst, who could
not be named because the information was not public, full
recovery for secured lenders would require EBITDA of between
$2.4 billion and $3.7 billion.
Current projections forecast EBITDA at only between about
$1.5 billion and $2 billion, the analyst said.