Biggest Leverage Buyout Goes Bust With Energy Future’s Big Bankruptcy

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Once known as TXU Corp., Energy Future Holdings Corp., filed for Chapter 11 bankruptcy protection in Delaware today as it looks to restructure and rework a debt load that now exceeds $40 billions. With the Plains States pushing domestic natural gas production to worldwide leader status in the last years, the private-equity owners of Energy Future grossly erred on what direction natural gas prices would head and will now deal with the misguided investment and expectations of higher prices.

Quick restructuring?

The Dallas-based energy concern has an ambitious plan for restructuring that has been agreed with numerous creditors in the hopes of emerging from court within 11 months’ time. In a nutshell perhaps too simplistic, bondholders’ at one unit would control Energy Future’s regulated power-delivery business, while lenders would control the company’s unregulated subsidiary. While many are sold on the idea, it would be nothing short of miraculous if lawsuits weren’t filed by other lenders.

As the 8th largest bankruptcy case in U.S. history hiccups are to be expected as bankers, lawyers and turnaround specialists look to take in enormous fees. Delay’s in the proceedings will simply line the pockets of those hired to implement whatever course is dictated to company in court. Employees and customers are expected to be reasonably unaffected by the case and the lights are expected to remain on for the 1.5 million residential customers that Energy Future serves. Texas is a “highly competitive market” according to the retail manager of Energy Future and the company has seen 400,000 customers leave since 2008 when it serviced 1.9 million households.

Winners and losers

The company has a fair amount of cash on hand and will also have $11 billion in bankruptcy loans to pay its employees and keep plants operating. The real losers in the deal are the firms that were involved in the buyout. TXU was taken private in 2007 for $32 billion as well as $13 billion in assumed debt. TPG, Goldman Sachs Group Inc (NYSE:GS), and KKR & Co. L.P. (NYSE:KKR), were the big players in the buyout and have already written down the $8 billion they collectively invested in the company and on rising gas prices.

On the other side, if gas prices begin to rise and the restructuring goes smoothly Apollo Global Management LLC (NYSE:APO) and The Blackstone Group L.P. (NYSE:BX)’s credit arm Capital Partners, could see a tidy profit from the discounted debt they have been acquiring.

Today’s announcement wasn’t a complete shock for many analysts and those in the know. The company has unsustainably been begging for debt deadline extensions for years in the hopes that natural gas prices rise again, that hasn’t happened. The deal with creditors that the company has apparently reached was done in the last weeks with a marathon session last night at the law offices of Kirkland & Ellis LLP in New York.

U.S. Bankruptcy Judge Christoper Sontchi is expected to rule on the case, and earlier today was asked by a representative for some bondholders to move the case from Wilmington, DE to Texas in “the interests of justice” and “convenience of the parties.” Energy Future is looking to stay in Delaware citing the fact that is where it is incorporated and the case focuses on its balance sheet.

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