(Reuters) - Energy Future Holdings Corp, the biggest power company in Texas, won a ruling on Wednesday in a $431 million dispute with its noteholders that should bolster its plans for emerging from bankruptcy.
The ruling denied noteholders an avenue to collect a “make-whole” payment from a unit of Energy Future for redeeming securities early. The opinion is also one of the first by a judge in the busy U.S. Bankruptcy Court in Wilmington, Delaware, in an area that has become hotly contested in corporate restructurings.
A make-whole provision is meant to protect a bondholder with a long term investment horizon from being forced into an early redemption of a high-yielding security. Bondholders have become increasingly willing to fight for the make-whole payments in recent corporate bankruptcies because there are few other high-yield investments.
In the case of Energy Future, the power company redeemed first-lien notes after it filed for bankruptcy in April 2014, and some noteholders sued for the make-whole payment.
In his 39-page ruling, Judge Christopher Sontchi determined that the harm to noteholders in allowing them to pursue the make-whole payment did not outweigh the harm to Energy Future. He said a ruling in favor of the noteholders could have exposed the company to similar claims from other creditors and the cost could have run to approximately $900 million.
The ruling is the second from Sontchi in the dispute. He found in March that Energy Future’s bankruptcy filing triggered an automatic acceleration of the debt, meaning it was not an optional redemption that required a make-whole payment.
In response, the noteholders sought to rescind the automatic acceleration retroactively, which they argued would render the redemption of their debt optional and would require the make-whole payment.
To do that, however, they needed Sontchi to lift the automatic stay of bankruptcy, which on Wednesday he declined to do.
Energy Future has proposed a reorganization plan backed by some creditors, with hopes that it can emerge from Chapter 11 in about a year.
The company’s bankruptcy plans have been strenuously opposed by a group of junior creditors, who are pushing their own proposal to convert part of the company’s power distribution business into a real estate investment trust.
Energy Future was formed after the 2007 record buyout of TXU Corp led by KKR & Co, TPG Capital Management and the private equity arm of Goldman Sachs.