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July 14, 2014 1:55 am
A surge in market valuations has transformed creditors’ expectations of what they will recoup from the bankruptcy of Energy Future Holdings and intensified disputes between holders of its debt just 10 weeks after the Texas utility owner became the largest leveraged buyout ever to go bust.
New estimates of the worth of the empire’s assets have emboldened junior debt holders who once thought they would recover little from the restructuring to assert claims that they too are in the money. Senior creditors meanwhile are becoming reluctant to stand by concessions they made at the time of the bankruptcy filing. Together, they threaten to torpedo the restructuring agreement that EFH worked out, creditors, lawyers and advisers say.
If valuations continue to rise, it is possible that even equity holders might be in the money, though it is unlikely that any senior creditors would allow the trio of private equity funds that bought the company in 2007 to realise any money from their poorly timed acquisition. Goldman Sachs, KKR and TPG funds bought the former TXU for $48bn in equity and debt just as credit markets collapsed.
The escalation in valuations has been fuelled by the Federal Reserve’s easy money and quantitative easing policies, according to a variety of creditors, lawyers and advisers involved in the complicated proceedings. The same forces that have lifted the stock market to record highs and brought the cost of junk debt to near record lows have also lifted valuations of the profitable pieces of EFH’s business and driven more money into the funds involved in buying and selling chunks of the more than $40bn debt burden it still carries.
“In this part of the cycle, most traditional distressed names get bid up,” says John Dionne, a former head of the distressed business at Blackstone now at Harvard Business School.
Oncor, the profitable regulated Texas utility which is 80 per cent owned by the EFIH unit of Energy Future, was initially valued at between $15bn and $16bn.
But creditors are now valuing the utility at $17.5bn or more, and those that hope to take control of Oncor saying it could be worth as much as $20bn if it became the object of a bidding war.
Meanwhile, the value of a junior portion of the debt, a thin sliver of notes low in the capital structure of the EFIH unit, has soared to more than 120 cents on the dollar, or well above par, compared with the 70 cents on the dollar at which it traded around April 29, the date of the bankruptcy filing.
Other factors pushing the valuations higher include the end of the uncertainty that surrounded EFH in the months before the much anticipated bankruptcy filing, as well as information that has been released during the course of court proceedings since then.
Oncor’s valuation has also benefited from the emergence of a strategic player hoping to gain control of the utility. In June, NextEra Energy, a Florida-based win utility, approached a group of creditors in the EFIH unit of Energy Future Holdings which controls Oncor with a refinancing proposal which would give the group the majority of equity in the utility and make other creditors whole.
When those talks broke down, NextEra floated its own proposed financing on more attractive terms. Such competitive jockeying has contributed to a breakdown in the 11-month timetable the company said it originally envisioned for its emergence from Chapter 11 bankruptcy.
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