-- U.S. electric utility holding company Energy Future
Holdings Corp. (EFH) and its subsidiary Energy Future
Intermediate Holding Co. LLC (EFIH) have completed a debt
exchange and have announced two more exchanges, one for senior
unsecured EFH debt and one for senior secured EFH and EFIH debt.
-- EFH subsidiary Texas Competitive Electric Holdings Co.
LLC (TCEH) has announced an offer to extend the 2013 maturity of
the $645 million portion of its total $2 billion senior secured
revolving credit facility to 2016, after having drawn down fully
on the revolver earlier in the month. The offer involves
substantial incentives for takers.
-- We view all of the transactions as distressed debt
exchanges, given maturity extensions, payments for less than
(but close to) par, payments of interest with payment-in-kind
(PIK) in some cases, and other features such as changes to
security, but overall because EFH is undertaking them to manage
upcoming maturities from 2014 to 2017 in a market that will
almost certainly not produce the cash flow to refinance them.
-- We are lowering our corporate credit ratings on EFIH,
TCEH, and Energy Future Competitive Holdings Co. (EFCH) to 'CC'
from 'CCC' and kept the outlook negative. We left unchanged our
'SD' corporate credit rating on EFH, which just completed a
distressed exchange and which has debt involved in the current
exchange offer. There are no rating actions at all at Oncor
Electric Delivery Holding Co. LLC (Oncor).
-- We are also revising upward our recovery rating on the
senior secured second-lien debt at EFH and EFIH to a '5' from a
'6' after updating our valuation of distributions to EFIH from
On Dec. 26, 2012, Standard & Poor's Ratings Services lowered
its corporate credit ratings on EFIH, TCEH, and EFCH to 'CC'
from 'CCC' and kept the negative rating outlook with the
announcement of various exchanges--completed and announced--that
we view as distressed.
We kept unchanged EFH's 'SD' rating, reflecting another
completed exchange on Dec. 21, 2012 of senior unsecured cash pay
and PIK toggle notes into new debt at EFIH, and another offer to
exchange the remaining balances of cash pay and PIK toggle notes
into more new debt at EFIH.
We lowered to 'CC' from 'B-' the debt related to the
announced exchange of senior secured debt at EFH and EFIH: 10%
senior secured notes due 2020, EFH's 9.75% senior secured notes
due 2019, and EFIH's 9.75% senior secured notes due 2019. We
lowered to 'CC' from 'CCC' our rating on TCEH's senior secured
revolving credit facilities due between 2013 and 2017, which
contains the revolving credit facility involved in the
We lowered to 'CC' from 'CCC' our corporate credit rating on
EFH subsidiary EFCH. EFCH guarantees TCEH's senior secured debt
(which includes the revolver) and so falls to 'CC' along with
TCEH. We revised our recovery rating to '5' from '6' on the
senior secured second-lien debt at EFH and EFIH.
This change in the recovery rating results in a change in
the rating on these securities to 'CCC-' from 'CC.' Rationale
The distressed debt 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 TCEH; CCC/Negative/--) approximate $20 billion coming
due between 2014 and 2017.
The efforts also reflect liquidity preservation. Recent and
announced exchanges of the EFH cash pay and toggle notes for new
EFIH notes allow interest PIK for the next three years,
preserving liquidity in a time when Oncor distributions are low
to due high capital spending. The exchange of senior secured
debt at EFH and EFIH into new debt at EFIH moves those lenders
closer to the best value in the firm--distributions from
Oncor--and into a larger pool of EFIH debt that likely adds to
greater market liquidity for those lenders.
We view this exchange as distressed; although the terms
given up are close to those to be received, two maturities are
extended beyond original terms so we are viewing this exchange
within the larger recapitalization of the firm through multiple
distressed exchanges. Interestingly, at TCEH, the firm had drawn
$285 million of the $2 billion revolver as of Sept. 30, 2012,
but chose to draw the entire revolver down before announcing the
exchange--clearly an effort to build liquidity going into the
high-risk 2014 to 2017 refinance period, but potentially
increasing near-term default risk if the exchange is not
TCEH has noted that a holder of $425 million of the $645
million piece due in 2013 has already committed to the exchange,
improving chances for success. The incentive cost to TCEH is
large; takers receive as incentive new term loans equal to 52%
of the amount tendered. Liquidity We view consolidated liquidity
as "less than adequate" given TCEH's large $3.8 billion term
loan coming due in 2014. While we believe EFH should have
sufficient liquidity to operate through 2013, it will face a
sharp liquidity decline in 2014.
Furthermore, EFH does not meet several qualitative
characteristics required for "adequate" liquidity, including
satisfactory standing in the credit markets, prudent risk
management, and the ability to absorb high impact, low
probability events with limited need for refinancing. As of
Sept. 30, 2012, liquidity consisted of $1.79 billion in cash and
equivalents ($625 million at EFH, $858 million at EFIH, $309
million at TCEH), $1.2 billion in TCEH's senior secured revolver
not due within the next 12 months, and $265 million in TCEH's
letter of credit facility.
Significant changes have occurred recently. In its 8-K of
Dec. 21, 2012, EFH reported TCEH liquidity on Dec. 21, 2012, of
$1.3 billion in cash and equivalents (after the revolver
drawdown) plus $114 million available in the secured letter of
credit facility, for a total of $1.4 billion. TCEH noted that it
would terminate its ability to draw on the letter of credit
facility on Dec. 24, 2012. EFH's liquidity is augmented by cash
flow, which is somewhat predictable over the next year from
Oncor and from TCEH given the large hedge position that
mitigates low natural gas prices. Expected uses of cash over the
next 12 months include about $550 million in capital spending
and about $745 million in debt maturities, giving a liquidity
sources divided by uses ratio of about 2.1x in 2013.
Following a review of the company and recovery prospects
following a simulated default in 2014 when TCEH's $3.8 billion
senior secured term loan comes due, we left all recovery ratings
unchanged except for our recovery rating on EFH and EFIH's
senior secured second-lien debt; we increased it to '5' from '6'
based on our increased valuation of distributions from Oncor,
following a simulated EFH-EFIH-TCEH default.
In such a default situation, we conclude that Oncor will
continue to operate without interruption and will not be pulled
into its parent's insolvency. Our detailed recovery report for
EFH and subsidiaries will be published shortly.
The overall outlook for credit at the companies is negative.
We think more such capital re-engineering through distressed
exchanges will continue because wholesale and retail electricity
cash flow will remain depressed given the low power prices in
the Electricity Reliability Council of Texas region in 2013 and
probably more so in 2014 as the firm's currently favorably
priced natural gas hedges begin to roll off in 2013. If the
EFH-EFIH and TCEH exchanges are consummated as planned, then we
would lower the corporate credit ratings to 'SD' from 'CC' and
shortly thereafter return to their fundamental credit level. If
the exchanges are not completed, then we would revise all
ratings to their fundamental credit levels. Similarly, the debt
involved in a consummated exchange will also to be lowered to
'D' and thereafter may be returned to its fundamental credit
level. We may retain the 'D' rating on any debt issue that we
consider highly likely to be subject to further exchanges.