Energy Future Restructuring Talks Progressing, but Slowly

Efforts to restructure Energy Future Holdings are progressing, albeit slowly, as the embattled Texas utility moves toward an expected bankruptcy filing, people close to the talks say.

Discussions among disparate sets of stakeholders are advancing but have not yet broadened to the point that all key stakeholders are in the same room, said the people, who declined to be named because talks are private.

The conversations will have to become broader if a deal is to be reached to overhaul the former TXU Corp, whose complex capital structure is split into two key subsidiaries that each have their own creditors and negotiating dynamics. The company said in a U.S. Securities and Exchange Commission filing on Tuesday that talks will continue and negotiating stakeholders will remain bound by non-disclosure agreements.

The company is expected to file for bankruptcy around the end of the month, at the expiration of a 30-day grace period on skipped interest payments. It would prefer to do so with the framework of a restructuring already secured, which would save time and money in Chapter 11.

Lenders Warming
For lenders to Energy Future's competitive merchant power business, who hold about half of the company's more than $40 billion in total debt, the main discussion point is tax liability. The lenders, which include private equity giants like Apollo Global Management and Oaktree Capital Group, are warming to the idea of a deal that does not include the so-called "tax basis step-up" they were initially seeking, according to two of the people close to the matter.

The lenders had hoped to acquire the power merchant unit through bankruptcy using the debt they are owed, which would allow them to increase, or "step up," the unit's tax basis and save money on future taxes, perhaps more than $1 billion, according to one of the people.

The controversial proposal, though, would create a multibillion-dollar capital gains tax liability at Energy Future's parent, which the company is not expected to be able to pay.

The lenders are willing to go along with an acquisition that does not employ the step-up, in exchange for some other form of compensation, such as equity in the reorganized Energy Future parent, said the two people.

Make-whole Fight
But determining compensation may not be easy. A group of unsecured noteholders of Energy Future's power delivery business is angling for control of that business, and would play a key part in any negotiation with the lenders over equity or other compensation.

The noteholders, however, are locked in their own disputes with other creditor factions over the costs of refinancing debt.

Roughly $9 billion in bankruptcy loans are being negotiated by the company, some of which is earmarked to pay off the most senior secured bondholders of the delivery business, leaving the noteholders with some of that unit's equity. But the secured bondholders say they are entitled to so-called "make-whole" payments, a form of compensation for agreeing to refinance.

The noteholders want to minimize those payments, which would come out of their pockets as the company's new owners. According to one person close to the matter, the noteholders have threatened litigation to address the issue.

The messier that fight gets, the more it could threaten negotiations with the lenders, whose willingness to forgo the tax step-up is based in part on the prospect of a quicker, smoother transaction. According to two of the people, the deal being discussed would give the lenders the right to walk away if benchmarks are not reached by certain dates.

Energy Future was created in the largest-ever leveraged buyout, a $45 billion deal in 2007 led by KKR & Co, Goldman Sachs Group Inc's private equity arm and TPG Capital Management. The deal closed shortly before a plunge in natural gas prices eroded profits at Energy Future's nuclear and coal-fired plants, and the sponsors are expected to recover little, if any, money.

(By Nick Brown and Billy Cheung; Editing by Eric Walsh)