February 7, 2013 6:20 pm

Energy Future Holdings acknowledges the inevitable, taps Kirkland & Ellis to kickstart workout prep

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While leveraged finance pros celebrate Dell and the return of the jumbo LBO, the restructuring community is focused on signals that Energy Future Holdings (EFH), the poster child for private equity excess, is finally kicking off preparations for a workout.

The over-levered power company has brought legal counsel Kirkland & Ellis on board to lay the groundwork for a potential restructuring, three sources familiar with the matter and three advisory sources not involved tell Debtwire. The firm has yet to recommend a specific workout plan, and is in the early phases of helping management asses delevering options, the sources added.

Management is also considering a financial advisor hire to complement Kirkland’s work, two of the sources familiar continued.

EFH was acquired by KKR and TPG in 2007 for USD 45bn in what is considered the largest leveraged buyout in US history. The borrower orchestrated a series of liability management exercises that have pushed its potential restructuring into the 2014 timeframe, and helped create optionality for the sponsors by ring-fencing the regulated Oncor Holdings from the crushing LBO debt at subsidiary Texas Competitive Electric Holding (TCEH).

Still, some investors expecting a more aggressive restructuring timeline point to the upcoming coupon payment on TCEH’s USD 1.65bn 10.5%/11.25% senior toggle notes due 2016, which go cash-pay on 1 May, as a potential trigger point, said two of the sources familiar.

Triggers next year include tightening liquidity and the October 2014 maturity on a USD 3.8bn non-extended loan at TCEH. The unregulated merchant power producer TCEH is under pressure from continued low natural gas prices that keep revenue subdued and threaten to erode the company’s profit margins just as hedges begin rolling off this year. The subsidiary had USD 309m of cash and USD 1.769bn available on its USD 2.05bn revolver due 2016 as of 30 September.

To buy more time and avert a going concern qualification in its 2012 audit, TCEH last month extended a USD 645m piece of its revolving credit due October 2013 to 2016 by offering a 52% extension fee in the form of a new term loan.

Meanwhile the parent, through its subsidiary Energy Intermediate Future Holdings (EFIH) owns 80% of Oncor, which is Texas’ largest regulated electric delivery business. EFH cut the umbilical cord in August 2012 when it used proceeds from a new USD 850m bond to fully eliminate a USD 680m intercompany loan that TCEH lent to the parent group. That move eliminated a cross-default risk that could have played out in the event of a restructuring at TCEH, as reported.

Most recently, the company disclosed in a regulatory filing a plan to neutralize the impact of a potential excess loss account on the parent in case of a restructuring of Energy Future Competitive Holdings Company (EFCH), which owns the stock in TCEH.

The net loss account, which cropped up as part of the historic 2007 LBO, would be triggered as taxable income at the parent in certain situations, including a EFH disposition of EFCH stock, as reported. The proposed transaction contemplates transferring the loss account to a newly created entity and neutralizing its impact. The company sought a private letter ruling from the IRS to approve the tax treatment of the proposed transaction and is waiting for a response from the agency.

TCEH’s USD 15.4bn Libor+ 477bps TL due 2017 is quoted 64.6/65.4, down from 66.05/66.5 on 4 February, according to Markit. Meanwhile the non-extended USD 3.8bn L+ 377bps TL due 2014 is quoted 68.6/69.5 today, down from 74.9/75.6 last week, according to Markit.

The 10.5%/11.25% notes due 2016 traded at 25 on 1 February down from 26.5 on 29 January, according to MarketAxess.

Calls to EFH and Kirkland were not returned.

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