US CREDIT-EFH exchanges may clear way for Oncor spinoff

By Karen Brettell

NEW YORK, July 22 (BestGrowthStock) – Privately-held Energy Future
Holdings Corp is seen as likely to target its longer-dated
bonds for further debt exchanges as the company clears the path
to what analysts believe may be an eventual separation of the
company’s best performing asset, regulated electric delivery
company Oncor.

EFH, formerly known as TXU, last week launched an offer to
exchange around $4.5 billion in bonds maturing in 2017 for up
to $2.18 billion in new, longer-dated secured debt at a
subsidiary, and $500 million in cash, at a discount of around
20-to-30 percent of the current debt’s par value.

Participants in the exchange must also agree to remove
numerous restrictions in the debt terms relating to mergers and
other terms.

Bondholders that don’t tender their debt risk being further
subordinated in the company’s capital structure that includes
$44 billion in debt.

Some analysts view the latest exchange as part of a plan by
the company’s owners, including Kohlberg Kravis Roberts & Co
(KKR.UL: ), to separate Oncor from Energy Futures, as many view
Oncor as being the only asset left at the company that has
remaining equity value.

“They paid a lot for the company and they may get no value
out of the consolidated group as the debt exceeds its assets,”
said Chris Chaice, analyst at research firm Covenant Review.
“Oncor by itself may have value.”

EFH spokeswoman Lisa Singleton said that the company’s
owners are legally obligated to maintain majority ownership of
both EFH and its subsidiaries until October 2012. There would
also be a significant tax burden to any spinoff of Oncor before
2012, she added.

Restrictions relating to EFH’s debt relative to its
earnings, before any dividends can be paid to the private
equity firms, also remain in its bonds, she said.

Energy Future Holdings has been burdened by its debt since
being taken private in 2007 by KKR, Texas Pacific Group
(TPG.UL: ) and Goldman Sachs (GS.N: ). The company’s obligations
include around $22 billion in bank debt at the company’s Texas
Competitive Electric Holdings unit that matures in 2014.

Spokespeople at KKR, TPG and Goldman declined comment.

Moody’s Investors Service cut its probability of default
ranking on Energy Future Holdings by two notches to Ca, ten
steps below investment grade, calling the offer a distressed
exchange, which constitutes a default under the rating agency’s

“Energy Future Holdings has been slowly pursuing a strategy
to create incremental financial flexibility with respect to its
indenture restrictions,” Moody’s added. “These flexibilities
address certain structural challenges related to any potential
disposal of Oncor, among other provisions.”

Standard & Poor’s also cut its ratings on the company due
to the exchange.

In addition to relaxing debt covenants, the company’s
exchanges also appear aimed at reducing debt held at the
holding company, said Covenant Review’s Chaice. Removing debt
at the Energy Future Holding level removes the risk that
bondholders could legally challenge any spinoff of Oncor as a
fraudulent transfer, he said.

Creditors can legally challenge asset transfers if it can
be argued a company is insolvent, and if it does not receive an
equivalent value to the asset that is spun off.

More debt will need to be exchanged to clear the path to
any spinoff of Oncor, with Energy Future Holdings’ 6.5 percent
bonds due 2024 and 6.55 percent bonds due 2034 most likely next
on the list, Chaice said.

These bonds have each dropped more more than a cent since
the latest exchange was announced, and are trading at around 44
cents on the dollar, according to MarketAxess.

Energy Future Holdings said holders of 52 percent of bonds
affected by the current debt exchange have agreed to tender,
however finding more support may be challenging.

“We believe most bondholders are likely to be extremely
upset with the current offer and are not likely to acquiesce
without a fight,” Peter Thornton, analyst at research firm KDP
Investment Advisors, said on Monday in a report.

Energy Future Holdings encountered resistance from holders
of debt made subject to an exchange last year, with only $358
million of $6 billion in bonds being tendered. For details, see


(Editing by Theodore d’Afflisio)

US CREDIT-EFH exchanges may clear way for Oncor spinoff