Energy Future Holdings Corp., the company formerly known as TXU Corp., is morphing from the largest LBO ever to what could be an enormous distressed debt buying opportunity.
Money managers are mixed on Energy Future Holdings as a current investment. Some can't wait for the Dallas-based energy company to fall into bankruptcy, hoping to buy distressed debt on the cheap. Others won't touch the bonds because they don't believe natural gas prices will increase.
Industry executives have been buzzing about an impending Energy Future Holdings bankruptcy since the company proposed a restructuring plan on April 15.
Although an Energy Future Holdings spokesman said there are no current plans to file for bankruptcy, a recent Securities and Exchange Commission filing outlines a possible restructuring that could occur outside of bankruptcy court.
That proposal would erase the $32 billion in debt that remains from the 2007 leveraged buyout. Under the plan, the first lien holders or senior creditors would get a combination of equity and a slice of a $5 billion cash pool or new long-term debt. The first lien holders would own 85% of the company and the original private equity buyers would retain 15%, said Jason Hahn, a senior high-yield analyst in the Des Moines office of Principal Global Investors. He was discussing information contained in the SEC filing. This would be a better outcome for the original private equity buyers, who might end up with zero should the company file for bankruptcy, he said.
Some hedge fund, private equity and fixed-income managers — including Franklin Templeton Investments, Apollo Global Management LLC, Centerbridge Partners and Third Point LLC — already are scooping up the debt. Industry insiders suspect they are hoping to parlay the debt into an ownership stake after a restructuring. The result of that kind of buying spree means even more exposure to Energy Future Holdings for investors.
GSO, the credit business of The Blackstone Group LP, has a small passive position in Energy Future, Blackstone spokesman Peter Rose said in an e-mail.