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EFH payment gives little recourse to frustrated creditors

Nick Brown
Thursday, 31 Oct 2013 | 7:37 PM ET

Oct 31 (Reuters) - Senior lenders to Energy Future Holdings are upset that the company plans to make a critical interest payment to junior bondholders on Friday, but they likely have no legal recourse to prevent it, according to experts and people close to the matter.

The lenders, who hold about $20 billion in secured bank debt, had hoped EFH would skip the $270 million interest payment to the bondholders and instead file for bankruptcy to restructure its $40 billion debt load.

A bankruptcy would have given the senior lenders - which include Apollo Global Management, Oaktree Capital Management and Centerbridge Partners, among others - first claim on the money being paid to the bondholders.

But aside from trying to flex their muscles in future negotiations, there is not much the lenders can do to hit back. Pushing EFH into an involuntary bankruptcy is likely impossible at present, and filing a lawsuit to claw the money back would be difficult, according to experts and people close to the talks who declined to be named because discussions are private.

The company is preparing a U.S. Securities and Exchange Commission filing as soon as Friday, detailing the latest on restructuring talks with creditors, according to a third person familiar with the matter.

Energy Future Holdings was created in October 2007 in a $45 billion buyout of Dallas-based TXU Corp, the biggest electricity generating and distribution company in Texas.

The buyout, led by KKR & Co, TPG Capital Management LP and the private equity arm of Goldman Sachs, saddled the company with debt just as natural gas prices were about to plunge, making its coal-fired plants unprofitable.

EFH is widely expected to file for bankruptcy eventually and has been negotiating with creditors in hopes of having the framework of an agreement in place before filing, saving it time and the cost of a lengthy spell in Chapter 11.

The next interest payment to the bondholders in question falls due in May, but the company may have to act before then.

In the first quarter of next year, EFH expects to receive an opinion from auditors on whether it can survive as a going concern based upon its annual financial statements. It may have trouble convincing auditors to grant a positive opinion, given that $3.8 billion of bank debt matures in October 2014 and the company has only around $1.5 billion of cash. Failure to secure such an opinion would trigger a default of EFH's $20 billion of bank debt, meaning lenders could push the company into bankruptcy.

That means restructuring efforts are likely to come to a head sometime in the first quarter of 2014, the people close to the matter said.

TO PAY OR NOT TO PAY

Friday's interest payment date had been viewed by creditors as a deadline for EFH's efforts toward a consensual restructuring, and the company had been expected to skip the $270 million payment and file for bankruptcy regardless of whether it had the framework of a deal.

But Reuters reported on Wednesday that EFH was leaning toward making the payment and avoiding a default, which would delay any expected bankruptcy filing.

The senior lenders view the payment to subordinated bondholders as money out of their own pockets, because they would have had first claim on certain of the company's assets in the event of a Chapter 11 filing, said the two people close to the matter.

The move may chill relations between the company and the lenders as restructuring talks carry on. The lenders, through sheer size of their claim, have more bargaining power than other creditors, which could make life difficult for the company if the lenders are dissatisfied with developments.

"If this undermines the lenders' faith in management, that might well outweigh any benefit of delaying the bankruptcy," Stephen Lubben, a bankruptcy expert and professor at Seton Hall University School of Law, told Reuters.

But from a legal standpoint, EFH is probably safe from backlash. While the lenders could sue to try to recover the money as a so-called fraudulent transfer, they would have to prove that the payment was made to injure them, and that it rendered EFH insolvent - a difficult prospect, said the two people familiar with negotiations.

Besides, Lubben said, "paying a debt that is actually due, according to its terms, is not a fraudulent transfer" under bankruptcy laws.

Likewise, the lenders would be hard-pressed to force EFH into an involuntary bankruptcy to avoid the payment, said John Penn, a bankruptcy lawyer at Perkins Coie in Texas.

Under bankruptcy laws, creditors who want to force debtors into bankruptcy must prove that the debtor is generally not making its interest payments as they come due.

"You can't prevail in an involuntary petition unless you show that a debtor is not paying debts," Penn told Reuters. "It's not just a balance sheet test."