NEW YORK - Kohlberg Kravis Roberts & Co's plan to restructure the debt of Energy Future Holdings following a massive 2007 leveraged buyout is in jeopardy because of opposition from key bondholders, a source close to the deal said on Friday.
Franklin Templeton Investments and other major bondholders holding more than 50 percent of bonds targeted in the debt exchange have formed a group to oppose it, the source said. The opposition will not prevent Energy Future from exchanging some of its bonds, but the group does have enough participants to block key covenant changes, according to the source.
The covenants are extremely valuable to bondholders because they would prohibit Energy Future from selling its regulated transmission unit Oncor, the crown jewel of the company, unless proceeds were used to pay down bond debt, the source said.
Spokeswomen for Franklin Templeton and Energy Future Holdings declined comment. A KKR spokesman referred questions to Energy Future Holdings.
Energy Future, formerly TXU, was loaded with debt when KKR, TPG Capital and Goldman Sachs Capital Partners took it private in the largest LBO ever. The company has been burning cash since the market for power worsened and a weak economy hurt demand.
On Monday, Energy Future offered to swap about $4 billion of new debt for outstanding notes in a bid to reduce its $43 billion debt load by $2 billion.
ONCOR SALE FEARED
As reported in the New York Post, the deal could have paved the way for separating Oncor from Texas Competitive Electric Holdings, Energy Future's unregulated unit. TCEH has struggled amid falling power prices and competition from alternative energy.
Bondholders would have received as little as 46.5 cents on the dollar for their outstanding notes in the exchange. They also feared that if covenants were changed, Oncor would be sold and proceeds doled out to KKR and the other private equity sponsors, a source close to the deal said.
The complex exchange offer, presented in a nearly 1,200-page document, would initially give participating bondholders an improved claim on Oncor assets. However, Oncor could later be sold, with proceeds going to buy another company that would back bondholders' debt, analysts said.
You don't usually get an exchange offer where you're actually changing the group of assets to which you're attached, said Adam Cohen, founder of Covenant Review in New York. The deal is also different from past exchanges because every bondholder loses, he said.
Under terms of the offer, bondholders who do not participate will be pushed below participating bondholders in their claims on the company's assets in event of a bankruptcy.
Despite that risk, many bondholders are holding out to block the covenant changes, one source close to the deal said.
BOND RALLY COMPLICATES EXCHANGES
It's a coercive exchange if we have ever seen one, Timothy Doherty, analyst at high-yield research firm KDP Investment Advisors said in a report on Monday.
The exchange offer expires on Nov. 3.
They'll just have to come back with a more attractive offer to bondholders, said Carl Blake, an analyst at independent research firm Gimme Credit. There's not an immediate crisis or liquidity issue in front of them so it means that they'll try something else.
Energy Future is the latest of scores of highly leveraged companies to attempt debt exchanges, usually to gain more time to pay bonds off as the economy struggles.
While most exchanges have been successful, a rally in junk bonds that has pushed prices higher has made it tougher to get bondholders to accept deep discounts, one trader said.
It's a little more of a game of poker now, said Christopher Munck, high-yield bond trader at B. Riley & Co in Los Angeles. At the beginning of the year the world was coming to an end and expected recovery values were just so low that I think the debtor had an easier time pushing through some of these deals. (Reporting by Dena Aubin; additional reporting by Biswarup Gooptu in Bangalore; Editing by Padraic Cassidy)