By: Peg Brickley |
A year into one of the biggest bankruptcies in history, the former TXU Corp . is still floundering through a $42 billion restructuring, having spent more than $200 million on lawyers and adviser but accomplishing little.
Driven to its knees by plunging energy prices, the Texas company now called Energy Future Holdings Corp . has spent the last 12 months stalled out in bankruptcy court amid the ruins of a carefully orchestrated strategy to tackle the debt load, the legacy of a 2007 leveraged buyout. Twice the company tried, and twice it failed, to build consensus among creditors for a restructuring plan.
“The consensus that we’ve reached is that we all hate the plans that they filed. So in that regard the debtor [Energy Future] has succeeded in bringing all the creditors together on the same page,” bondholder lawyer Edward Weisfelner said in court earlier this month.
But now there may be a way out, with investors circling the company’s prize asset, Oncor. A sale of Oncor, which is shielded from its parent’s financial trouble and rakes in cash from a transmissions business watched closely by regulators, would be the largest distressed mergers and acquisition transaction on record. Billions of dollars in new money is flowing toward a deal to take over Energy Future’s stake in Oncor, which could be worth $17 billion or more. The investors swarming around Oncor could be the key to a successful end to the hard-fought case—or they could be a recipe for another disaster.
If Oncor is auctioned off to outside bidders, Energy Future could be doomed to years in bankruptcy as creditors wrestle over the proceeds, sources involved in the case said. Energy Future would be caught up in an endless loop of litigation, just as Nortel Networks Corp. has been for years. The former telecommunications firm’s 2009 bankruptcy liquidation raised $7.3 billion, but creditors are still waiting to be paid, and legal fees in Nortel’s bankruptcy have topped $1.3 billion while the fight over the money continues.
The specter of endless courtroom bickering is spurring support for an alternative scenario that would capture the value of Oncor through an in-bankruptcy takeover backed by junior creditors, lawyers involved in the case said.
“A deal can get done,” bondholder lawyer Christopher Shore said at a recent court session. Creditors have called a truce in order to negotiate “a massive plan which creates huge amounts of distributable value and will allow these cases to exit in months, not years,” Mr. Shore said.
A coalition of junior creditors like Anchorage Capital Group LLC and Arrowgrass Capital Partners , which derailed Energy Future’s restructuring last year, are behind the move. They are raising $11 billion to fund the acquisition of Energy Future’s 80% stake in Oncor, through a REIT structure. The goal is to render “irrelevant” objections from other creditors with claims on Oncor by giving them all they’re owed, Mr. Shore said.
“It’s viable,” said Erik Gordon , a professor at University of Michigan Ross School of Business, commenting on the restructuring strategy. Prof. Gordon studies mergers and acquisitions and private equity, fields that often intersect with bankruptcy. “It neutralizes the potential objections of senior debt holders. As a creditor all you’re entitled to get is paid.”
In Dallas, Energy Future Chief Executive John Young says he’s “keeping the lights on” while the high-stakes restructuring drama plays out in the U.S. Bankruptcy Court in Wilmington, Del. Energy Future, its business stabilized by new financing, isn’t interested in finding out how long it can support the costs of a mega-bankruptcy, Mr. Young said in an interview. In 2014, Energy Future spent $220 million on lawyers and restructuring advisers.
“I have quit being surprised about things people will litigate about, especially in Wilmington, Del.,” Mr. Young said.
In broad outline, the junior-creditor-backed deal is a variation of the company’s own restructuring scenario. Energy Future would end up as the company had planned: split in two, with its electricity-generating-and-retailing business handed over to senior lenders and creditors of the division linked to Oncor paid in full. The big difference is the potential bonanza for junior bondholders who last year were being offered a recovery they said was worth a fraction of the nearly $8 billion they’re owed.
Energy Future has built the creditor-backed takeover into the chapter 11 plan it filed in April. But’s it told junior bondholders it wants to see committed financing. In the meantime, the company is forging ahead with an auction for its stake in Oncor. Offers are expected from NextEra Energy Inc ., from Hunt Consolidated Inc ., which has allied with existing creditors, and from other investors looking for a steady money-making asset in the tumultuous energy market.
The next two months will be crucial. Junior bondholders will know whether they can raise the money they need to pull off the takeover. Energy Future will pick a lead bidder for an open auction, unless creditors block the competition.
Junior bondholders fear the auction could trip their effort to springboard off of the value in Oncor into a successful end to the bankruptcy. Allow bidders to hang a price tag on the asset and Oncor is just a number, rather than an opportunity to rally creditors in support of a global settlement, said several sources active in the case.
Prof. Gordon says Energy Future “botched everything” by failing to test the valuation of Oncor before filing for bankruptcy, then “compounded the problem by stirring the creditors into an angry nest of hornets.”
Energy Future originally planned to hand over Oncor to favored investors in the debt of Energy Future Intermediate Holdings , the division that is linked most closely to Oncor, leaving nothing or next to it for junior creditors of Texas Competitive Holdings , the second major division. That result came from limited negotiations among those at the top, creditors’ lawyers have argued, aimed at a plan that can be forced down the throat of junior creditors left out of the bargaining.
The company’s owners TPG, KKR & Co. and Goldman Sachs , led the pre-bankruptcy bargaining with senior lenders including Apollo Global Management and Oaktree Capital Management. The equity stakeholders wanted to bow out gracefully, having already written off nearly all the $8 billion they originally invested.
They needed to avoid triggering a tax liability that could prove an embarrassment in future fund-raising efforts . Senior secured lenders wanted out quickly, having grabbed the TXU Energy and Luminant businesses that anchor their loans. Creditors of the division with prime claim on Oncor wanted payment in full, with interest, and, in some cases, premiums. Where Energy Future’s pre-bankruptcy bargaining fell short, lawyers said, was in failing to account for the value of Oncor, and the determination of junior creditors to be heard form once they got their day in court.
