| April 15
April 15 Efforts to restructure Energy Future
Holdings are progressing, albeit slowly, as the embattled Texas
utility moves toward an expected bankruptcy filing, people close
to the talks say.
Discussions among disparate sets of stakeholders are
advancing but have not yet broadened to the point that all key
stakeholders are in the same room, said the people, who declined
to be named because talks are private.
The conversations will have to become broader if a deal is
to be reached to overhaul the former TXU Corp, whose complex
capital structure is split into two key subsidiaries that each
have their own creditors and negotiating dynamics. The company
said in a U.S. Securities and Exchange Commission filing on
Tuesday that talks will continue and negotiating stakeholders
will remain bound by non-disclosure agreements.
The company is expected to file for bankruptcy around the
end of the month, at the expiration of a 30-day grace period on
skipped interest payments. It would prefer to do so with the
framework of a restructuring already secured, which would save
time and money in Chapter 11.
For lenders to Energy Future's competitive merchant power
business, who hold about half of the company's more than $40
billion in total debt, the main discussion point is tax
liability. The lenders, which include private equity giants like
Apollo Global Management and Oaktree Capital Group, are warming
to the idea of a deal that does not include the so-called "tax
basis step-up" they were initially seeking, according to two of
the people close to the matter.
The lenders had hoped to acquire the power merchant unit
through bankruptcy using the debt they are owed, which would
allow them to increase, or "step up," the unit's tax basis and
save money on future taxes, perhaps more than $1 billion,
according to one of the people.
The controversial proposal, though, would create a
multibillion-dollar capital gains tax liability at Energy
Future's parent, which the company is not expected to be able to
The lenders are willing to go along with an acquisition that
does not employ the step-up, in exchange for some other form of
compensation, such as equity in the reorganized Energy Future
parent, said the two people.
But determining compensation may not be easy. A group of
unsecured noteholders of Energy Future's power delivery business
is angling for control of that business, and would play a key
part in any negotiation with the lenders over equity or other
The noteholders, however, are locked in their own disputes
with other creditor factions over the costs of refinancing debt.
Roughly $9 billion in bankruptcy loans are being negotiated
by the company, some of which is earmarked to pay off the most
senior secured bondholders of the delivery business, leaving the
noteholders with some of that unit's equity. But the secured
bondholders say they are entitled to so-called "make-whole"
payments, a form of compensation for agreeing to refinance.
The noteholders want to minimize those payments, which would
come out of their pockets as the company's new owners. According
to one person close to the matter, the noteholders have
threatened litigation to address the issue.
The messier that fight gets, the more it could threaten
negotiations with the lenders, whose willingness to forgo the
tax step-up is based in part on the prospect of a quicker,
smoother transaction. According to two of the people, the deal
being discussed would give the lenders the right to walk away if
benchmarks are not reached by certain dates.
Energy Future was created in the largest-ever leveraged
buyout, a $45 billion deal in 2007 led by KKR & Co, Goldman
Sachs Group Inc's private equity arm and TPG Capital Management.
The deal closed shortly before a plunge in natural gas prices
eroded profits at Energy Future's nuclear and coal-fired plants,
and the sponsors are expected to recover little, if any, money.
(Editing by Eric Walsh)