-- Energy Future Holdings Corp. (EFH) has completed a private transaction
with some lenders to exchange about $1.6 billion in unsecured pre-leveraged
buyout (LBO) debt and senior unsecured LBO-related debt at the EFH level with
about $1.15 billion in senior unsecured debt at EFH subsidiary Energy Future
Intermediate Holding Co. LLC (EFIH).
-- We view the exchange as tantamount to a distressed debt exchange and
are lowering EFH's corporate credit rating to 'SD' from 'CCC' and lowering our
ratings on EFH's series Q and series R notes subject to the exchange to 'D'
-- The other EFH debt subject to the exchange--the 2017 cash pay and
payment-in-kind toggle notes and series P notes--are already rated 'D' based
on earlier distressed exchanges and our view that more such exchanges would
-- We assigned a 'CC' rating and '6' recovery rating to the new senior
unsecured EFIH toggle notes due 2018
-- Other ratings and recovery scores in the EFH hierarchy are unchanged.
On Dec. 6, 2012, Standard & Poor's Ratings Services lowered its corporate
credit rating on Energy Future Holdings Corp. (EFH) to 'SD' from 'CCC' based
on the consummation of a distressed debt exchange of five EFH-level debt
securities totaling about $1.6 billion with the new Energy Future Intermediate
Holding Co. LLC (EFIH) senior secured toggle notes due 2018 of about $1.1
billion. We assigned our 'CC' debt issue rating and '6' recovery rating to the
new EFIH notes. We lowered EFH's series Q and series R unsecured debt to 'D.'
The outlook on EFIH remains negative.
Under our criteria, we lower to 'SD' the corporate credit rating of a company
that undertakes a distressed exchange when it consummates the offer, and then
shortly thereafter revise the corporate credit rating to its fundamental
credit level taking the effects, if any, of the exchange into account.
The exchange continues EFH's strategy to reduce debt levels and its annual
interest burden through distressed exchanges and remove maturities in the
years in which EFH's subsidiary Texas Competitive Electric Holdings Co. LLC
(TCEH; CCC/Negative/--) approximate $20 billion coming due between 2014 and
2017. The exchange lowers EFH-level debt by about 12%. Even so, the new debt
includes an option to pay interest in kind for three years, helping EFH to
meet obligations while distributions from its regulated electricity
transmission unit Oncor Electric Delivery Co. LLC (BBB+/Stable) are low
because it is building out its share of the CREZ transmission line into West
Texas that will bring renewable electricity to load centers.
The exchange involved the cash-pay and payment-in-kind toggle notes issued to
help fund the LBO in 2007 and three of the pre-LBO debt securities, series P,
Q, and R. The cash-pay and payment-in-kind toggle notes are already rated 'D'
based on previous distressed exchanges, and kept there since more such
exchanges were likely. The series Q and R securities are also now rated "D"
and it is likely EFH will continue to reduce its balance further with similar
These securities have very low recovery prospects in our view, given that, in
a default situation, the enterprise value to EFH's approximate 80% ownership
in Oncor on a discounted cash flow basis after paying administration fees
would only cover the senior secured debt at EFIH and EFH, not to mention
second-lien debt. Lenders accepting the exchange might be looking to the
value, if any, of being closer to the asset that provides essentially all cash
flow to EFIH and EFH to meet obligations. We do not think there would be any
value going to EFH from TCEH in a default scenario, due to the very high debt
burden at TCEH; even the senior secured debt at TCEH will not be made whole in
a default situation in our view.
We will revise EFH's rating from 'SD' to its fundamental credit level shortly.
Related Criteria And Research
Rating Implications Of Exchange Offers And Similar Restructurings, Update, May
Energy Future Holdings Corp.
Corporate Credit Rating SD/--/-- CCC/Negative/--
Sr unsec series Q notes due 2024 D CC
Recovery rating 6 6
Sr unsec series R notes due 2034 D CC
Recovery rating 6 6
Energy Future Intermediate Holding Co. LLC
$1.1 bil sr unsecd notes due 2018 CC
Recovery rating 6