Hedge Fund Says Tottering, Dallas-based Electricity Giant is Screwing Creditors

Aurelius Capital Management, a multibillion-dollar hedge fund and perpetual pain-in-the-ass for distressed companies like Dallas-based Energy Future Holdings, sued the massive utility in federal court Tuesday for $725 million. It claims Energy Future made some sweetheart intra-company loans even as it was technically insolvent.

Aurelius, by the way, has a penchant for buying the debt of tottering companies and suing the pants off of them to increase the value of its investment. The fund claims Energy Future has drained its struggling power-generation subsidiary of billions of dollars, enriching its directors, weakening the subsidiary and screwing its creditors. The low-interest loans the parent company has received violate a covenant requiring arm's-length dealings between it and its subsidiaries, Aurelius claims.

The hedge fund said as much back in 2011 when it went on a buying spree, snapping up the utility's bonds. Energy Future denied the allegations but nonetheless succeeded in getting a majority of its credit holders to waive the provision of the loan Aurelius claims was violated.

Now Aurelius is taking the fight to court, citing a recent U.S. Securities and Exchange Commission filing that it says proves the Energy Future had no business getting loans with terms so favorable. "... Recent valuation analyses of [the power-generation subsidiary's] business indicate that the principal amount of its outstanding debt currently exceeds its enterprise value."

In other words, Aurelius says the subsidiary was upside-down when it made "fraudulent transfers" worth billions to Energy Future.

The subsidiary, which includes power generator Luminant, is upside-down, of course, because the value of its fleet of coal-fired power plants has depreciated considerably. A glut of natural gas has driven down the price of electricity. That cut into the profit margin Energy Future needed to handle the debt it assumed after being taken private in 2007 during the biggest leveraged buyout in history.

Since then, its quarterly reports have been splashed with red ink. Last year alone, the company logged a $3.36 billion net loss. Analysts believe the company is headed to bankruptcy court, and soon. Now it has to contend with Aurelius, known as a dogged litigator. The hedge fund says the missing interest on those allegedly sweet intra-company loans is worth $725 million.

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Brantley Hargrove