| NEW YORK, Sept 11
NEW YORK, Sept 11 Chances are growing slim for
Texas utility Energy Future Holdings to negotiate a prepackaged
bankruptcy with its creditors that would avoid a lengthy spell
in Chapter 11, several people close to restructuring talks said
The embattled company has been in talks for months with
secured lenders, which hold about $20 billion in debt.
But with interest payments of about $250 million due on Nov.
1 and with several key creditors yet to sign nondisclosure
agreements, time is running out to reach a prepackaged
restructuring, people close to the negotiations said.
In a prepackaged bankruptcy, the different parties reach a
restructuring deal before filing bankruptcy. Such an agreement
would need to be in place by about the end of September to give
Energy Future time to gain creditor support, two of the people
While not impossible, that scenario is unlikely, the people
said. The company still hopes to establish at least the
framework of an agreement before any Chapter 11 filing.
The company, which has about $1.6 billion on hand, could
also choose to make its Nov. 1 payment and extend the
discussions, though the people said the sides would like to
agree on a deal before then.
Further complicating matters, Energy Future has gradually
expanded restructuring talks since early in the year to include
different classes of creditors, said the people close to the
Initially limiting contact to the lenders at Texas
Competitive Electric Holdings, Energy Future's unregulated
merchant power unit, the company by summer was contacting
advisers for unsecured bondholders at a subsidiary that owns
Oncor, its regulated power delivery business, the people said.
Energy Future, formerly TXU Corp, was taken private in 2007
by a consortium including KKR & Co, TPG Capital
Management and Goldman Sachs Group Inc's private
equity arm. The $45 billion buyout, the largest-ever leveraged
buyout, saddled the company with debt just before a major
decline in natural gas prices and energy markets.
With a total of more than $40 billion in debt, Energy
Future's large and complex capital structure has hampered
restructuring talks. In April, equity sponsors proposed a
prepackaged bankruptcy that would have preserved a 15 percent
stake in the reorganized entity, handing the rest of the equity
to the lenders. But the lenders said the deal neither provided
them with sufficient equity nor reduced enough debt across the
capital structure to access greater cash flows stemming from
Andrew DeVries, a senior credit analyst at CreditSights,
called Oncor a "growing business that should generate improved
cash flows," but he added that the unit's long-term capital
structure is unsustainable, with only enough dividends to cover
half of cash interest payments coming due.
In a critical facet of Energy Future's restructuring,
parties must also determine how potential changes in ownership
could impact tax obligations.
In almost any restructuring scenario, debt reduction would
occur largely through creditors accepting equity in exchange for
canceling debt, which would create additional taxable income for
"Cancellation of indebtedness income can be sizable in
situations like these and can result in a large corresponding
tax liability upfront," said Willys Schneider, a tax partner at
Kaye Scholer who is not involved in the case.
That could give stakeholders an incentive to wait to
reorganize in Chapter 11, under which the company could defer
some of that added cost by applying net operating losses or
other rules that allow bankrupt companies to reduce tax