It's no secret that Dallas-based utility Energy Future Holdings is headed toward a restructuring of its untenable debt. As part of a potential bankruptcy plan disclosed back in April, senior debt holders would forgive tens of billions of dollars owed by the company's power generation arm, Luminant, in exchange for a big stake in the company. Meanwhile, the private equity guys like KKR walk away with essentially nothing.
It was widely believed that EFH had enough cash to last at least until a $3.8 billion payment is due in October 2014. But according to the Financial Times, the end may come a lot sooner than that. The paper reports that we may witness an epic corporate restructuring in a matter of months. Senior creditors -- the banks that hold the most solid claims on the company -- apparently may push EFH into bankruptcy by November, before the unsecured bondholders beneath them in the pecking order get a $270 million debt payment.
As for a restructuring plan with the company, one creditor told FT that the two sides aren't even talking at the moment.
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The most recent filings indicate EFH owes about $50 billion, but that it's worth only $39 billion. It's completely upside-down with the banks -- the creditors -- which may mean that if they want to push the company into bankruptcy early, they probably can.
For KKR and Goldman Sachs, they're smack-dab in the middle of what we referred to in 2009 as a "teachable moment." They loaded up a stolid old utility with unsustainable debt, betting on fat profit margins through a fleet of coal-fired power plants capable of generating power on the cheap. In a time of high natural gas prices setting robust electricity prices, it looked like a good investment. Who would have predicted that the price of natural gas would go anywhere but up?
Actually, as we reported in this cover story, that would have been then-TXU CEO John Wilder, who convinced investors to consent to the buyout because gas prices would likely dip below levels KKR needed to break even. And so they did after George Mitchell figured out how to horizontally drill and frack the Barnett Shale. The market got glutted with natural gas and electricity prices dove, along with the profits of Texas' biggest unregulated power generator.
Now KKR's investment is worth basically nothing, and the vultures are circling overhead.