Energy Future Holdings Corp. bowed to pressure from eight lender groups, ditching part of its $42 billion restructuring plan and inviting bids to refinance the unit that controls its prized Oncor electricity distributor.
The Texas power provider was set to lock in a pact reached before bankruptcy with select lenders, including Fidelity Investments, that would have paid them hundreds of millions of dollars in benefits while leaving some creditors out in the cold.
A judge in Delaware responded to dissident lenders’ show of opposition by forcing talks on a rival deal, which includes an Oncor takeover that values the unit at more than $17.5 billion, offered by a group including Morgan Stanley (MS:US) and NextEra Energy Inc.
“Before the case started, a consensus developed that there wasn’t enough value in Oncor” to pay creditors with a claim on it, said Amer Tiwana, a Stamford, Connecticut-based managing director with CRT Capital Group LLC who’s following the proceedings. “That notion is changing fast.”
Energy Future said in a regulatory filing today that it was “encouraged by the interest” and would hold a court-supervised auction for proposals to reorganize the holding company that owns an 80 percent stake in Oncor. Under the original deal, Boston-based Fidelity and other lenders would have gained control of that company, Energy Future Intermediate Holding Co.
Referring to the NextEra (NEE:US) offer, Dallas-based Energy Future said it will “continue to negotiate with each party that has submitted bids to date with respect to the reorganization.”
Energy Future’s 10.25 percent bonds due next year climbed almost 2.5 percent today to 15.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
In court filings yesterday, Energy Future made clear that it won’t meet its original timetable to exit bankruptcy by early next year as it seeks to restructure debt taken on in a record 2007 buyout.
The company asked U.S. Bankruptcy Judge Christopher Sontchi for six more months to put a new plan together. Currently, the company has until Aug. 27 to file a plan. After that, creditors can submit their own reorganization proposals.
With so many creditors pushing for change, Energy Future won’t really be in control even while its plan is the only one on the table, said Erik Gordon, a law professor at the University of Michigan Ross School of Business who’s following the case.
“The company is likely to get an extension to its exclusive right to submit a plan, but ‘exclusive’ now means ‘do more to line up creditor agreement than you did last time,’” he said in an e-mail today.
Energy Future’s assistant treasurer told Sontchi in a court filing that the company wants its exclusivity extended to Feb. 23 and is seeking to push back the time needed to win creditor votes for any proposal to April 25. Previously, the company had said it planned to exit bankruptcy by the end of March.
The extra time will give the company a chance to try to salvage the tax-free spinoff structure at the heart of the pre-bankruptcy deal it’s scrapping, said CRT Capital’s Tiwana.
Without that structure, there probably won’t be enough money to repay all the creditors of Energy Future Intermediate Holding because the Internal Revenue Service would become a creditor in the case with a claim of as much as $3 billion, he said.
The plan for a competitive auction of Oncor shows how concerted pressure by lenders can force a company to revise a program that some perceive as unfair.
In the case of Lehman Brothers Holdings Inc., it took a rival proposal by creditors including New York-based Goldman Sachs Group Inc. to shake up the payment priorities.
At the same time, Energy Future’s request for more time shows the power provider isn’t ready to cede control of its destiny just yet. The company intends to keep pushing for the tax-free spinoff enshrined in the pre-bankruptcy deal, known as a restructuring support agreement.
“Importantly, the termination of the RSA doesn’t alter our fundamental approach,” Energy Future said in a statement to employees today.
Energy Future filed for bankruptcy on April 29 with a plan to divide the business, splitting off the profitable regulated side of the company that owns Oncor from the side that controls the unprofitable Texas Competitive Electric Holdings.
The filing came seven years after Energy Future was taken private by KKR & Co., TPG Capital and Goldman Sachs Capital Partners, which were forced to accept an equity stake in the company of less than 1 percent under the original restructuring plan.
The case is Energy Future Holdings Corp., 14-bk-10979, U.S. Bankruptcy Court, District of Delaware (Wilmington).