(Updates with end of hearing, interim loan approval)
By Tom Hals
WILMINGTON, Del, May 1 (Reuters) - The largest power company in Texas, Energy Future Holdings Corp, began its bankruptcy turnaround by securing approval for an interim loan after seven hours of contentious arguments in a Delaware bankruptcy court.
Judge Christopher Sontchi approved the loan that was originally proposed at $2.7 billion, but he authorized that only $20 million could be spent. The company and its creditors will return to the Wilmington court on Friday to continue battling over the remainder of the money.
Thursday marked the first hearing in Energy Future Holdings’ bankruptcy, with creditors airing grievances over scheduling, value and how to administer the case.
Energy Future, created in the 2007 buyout of TXU Corp, filed one of the largest non-financial Chapter 11 bankruptcies in U.S. history on Tuesday after struggling more than a year to work out a deal with its creditors.
The company’s lawyer, Edward Sassower of Kirkland & Ellis, told the court its proposal was “wildly complicated,” and many creditors began to explore lines of attack on Thursday.
The company proposed splitting from the parent its Luminant power plant and TXU Retail electricity business, and turning the holding company that owns those assets over to lenders. In a separate deal, a group of unsecured creditors would end up controlling Texas’s largest network of power lines, a company known as Oncor that is not bankrupt.
The proposed deal would leave lower-ranking creditors of Texas Competitive Electric Holdings Co, or TCEH, the holding company for the power plants and retail units, with less than 3 percent of what they are owed. They raised the first objections.
“They don’t use the term wipe-out, but wipe-out is what they intend,” said Ed Weisfelner, a Brown Rudnick attorney who represents a group of lower-ranking secured creditors that is owed $1.6 billion.
Weisfelner said Energy Future is trying to undervalue the TXU Retail and Luminant businesses to steer those assets into the hands of investment firms that hold the $24.4 billion in loans.
Weisfelner grilled Paul Keglevic, Energy Future’s chief financial officer about the need for the $2.7 billion loan and the company’s use of cash.
Weisfelner mocked Keglevic’s arguments that he was constrained in his ability to negotiate by the creditors who will take over the TCEH business, who are known as the first-lien lenders.
“The first-lien lenders have a gun to their own head and you have to stop them before they kill their own company,” he told Sontchi.
An attorney for the lowest-priority unsecured creditors of the TXU Retail and Luminant business ticked off a string of what he called conflicts and said a reorganization of the corporate family in recent years could amount to a fraudulent transfer.
“We’ve got problems here,” said Tom Lauria, another White & Case attorney for unsecured creditors of TCEH.
An attorney who represented the creditors who would end up owning the TXU Retail and Luminant businesses tried to assure the judge his group would work with Weisfelner‘s, and talks would continue.
“This is not the end of the story. You have to start somewhere,” said Alan Kornberg of Paul, Weiss, Rifkind, Wharton & Garrison. He said he expected support for the deal among the class of creditors he represents to grow from the current 41 percent.
The second part of the agreements would swap ownership of the Oncor business, which operates the largest network of Texas power lines, to two groups of unsecured creditors. The company has proposed borrowing $7.3 billion to pay off higher-ranking creditors of the Oncor business.
Some of those higher-ranking creditors oppose the deal because it does not provide them with an added payment for retiring their debt prior to maturity. The company said it will litigate with creditors that hold out for that added money, known as a “make-whole payment.”
Energy Future and its affiliates owe $49.7 billion, mainly to hedge funds and investment firms. Its $36.4 billion in assets make one of the biggest non-financial Chapter 11 filings ever.
The case is In re: Energy Future Holdings Corp, U.S. Bankruptcy Court, District of Delaware, No:14-10979. (Reporting by Tom Hals in Wilmington, Delaware; Editing by Alden Bentley and Andrew Hay)