Energy Future Holdings may file for bankruptcy

Energy Future Holdings, formerly known as TXU, is likely to file for bankruptcy court protection. The company was part of one of the biggest leveraged buyouts in history, and the news will likely tarnish the idea of large deals.

The Wall Street Journal story by Emily Glazer and Mike Spector said the company was lining up loans after a deal with creditors fell through.

One of the biggest leveraged buyouts of an American company is preparing to file for bankruptcy protection, brought to its knees by heavy debt and a misguided bet on the direction of natural gas prices.

Energy Future Holdings Corp., previously called TXU Corp., is lining up loans to keep two subsidiaries operating during bankruptcy proceedings after months of talks have failed to produce an agreement with creditors on reworking its $40 billion-plus in debt, according to people familiar with the matter.

The two sides may yet reach a last-minute agreement, but prospects for a streamlined bankruptcy where creditors agree in advance on a restructuring plan have dimmed, the people said. The filing would likely result in a split of Energy Future’s two large operating subsidiaries, they said. A bankruptcy would be the 10th largest by assets in U.S. history.

The acquisition was part of the frenzied leveraged buyout boom where private-equity firms used massive amounts of debt to back a series of corporate takeovers including TXU, hotelier Hilton Worldwide Inc., office-building owner Equity Office Properties Trust and hospital operator HCA Holdings Inc.

James Osborne wrote for the Dallas Morning News that the company will likely fight to stay together despite its financial troubles:

CEO John Young has argued publicly against splitting up the company and its subsidiaries, Luminant, Oncor and TXU Energy. But he is facing creditors groups eager to extract as much value as they can from investments in some cases now worth pennies on the dollar.

The scenario under discussion would split Energy Future’s competitive arm, which controls generator Luminant and retailer TXU Energy, from its regulated arm, which controls transmission company Oncor.

Energy Future is in the process of setting up two $4 billion loans for each of the divisions to allow them to continue operating through bankruptcy separately.

But a source close to Energy Future cautioned that the company has no plans to cut a deal for the breakup before filing for Chapter 11. And once the case goes to court, the company will continue to lobby to keep its subsidiaries together.

The Reuters story by Nick Brown added this background about the creation of the company and how it got into so much debt:

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 (KKR.N), TPG Capital Management LP TPG.UL and the private equity arm of Goldman Sachs (GS.N), saddled the company with debt just as natural gas prices were about to plunge, making its coal-fired plants unprofitable.

Many industry experts believed the company would choose to skip a $270 million interest payment and file bankruptcy last November, but the company chose to make the payment, extending its runway for restructuring talks.

Its next day of reckoning may be fast approaching. Sometime this month or next, Energy Future 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 it does not have enough cash to afford the $3.8 billion of bank debt that matures in October. 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.

Maureen Farrell wrote a blog post for the Wall Street Journal that several banks could make even more money on the deal:

Three investment banks — Citigroup, Morgan Stanley and J.P. Morgan — could earn up to $300 million in fees, if they provide bankruptcy financing to Energy Future Holdings, the company formerly known as TXU.

If Energy Future Holdings files for bankruptcy, the three banks could earn another helping of sizable fees from the utility. Citi, Morgan Stanley and J.P. Morgan were among the consortium of banks that put together financing for the TXU buyout, the largest private-equity deal ever. KKR & Co., TPG and Goldman Sachs Group Inc. took TXU private in 2007 for $32 billion plus $13 billion in assumed debt.

Now, according to the WSJ’s Emily Glazer and Mike Spector, these three banks are talking to the company about providing debtor-in-possession financing, which allows a company to operate during bankruptcy proceedings. Bank of America, which was not an underwriter on the original deal, is also reportedly among the possible DIP lenders.

The high-profile bankruptcy will likely put a small tarnish of the notion of large deals, but leveraged buyouts on the scale of TXU aren’t the norm these days. What will remain to be seen is what this will mean for the funds holding TXU and its investors. It will also likely make many companies think twice about the debt loads they add to their deals.