The indenture trustee for the two issues of second-lien notes of Energy Future Holdings’ unit, Energy Future Intermediate Holdings
Litigation over the make-whole claim on the second-lien debt was expected in the case, whether via an adversary action or a motion before the bankruptcy court. A similar issue is also at play in the case in connection with the company’s proposed repayment of $5.4 billion of first-lien debt at EFIH.
The second-lien debt is comprised of about $1.75 billion of 11.75% second-lien notes due 2022 and about $406.4 million of 11% second-lien notes due 2021. The June 16 lawsuit filed by the notes’ indenture trustee, Computershare Trust Co., argues that under the indentures make-whole payments are due if the notes are repaid before March 1, 2017 (for the 11.75% notes) or May 15, 2016 (for the 11% notes).
According to the lawsuit, the company contends that the make-whole payments have not been triggered because the company is not opting to repay the notes early, but rather that the company’s bankruptcy filing on April 29 automatically accelerated the principal to become immediately due and payable.
In response to that argument, however, Computershare argued that bankruptcy law does not require a debtor to repay secured debt upon a bankruptcy filing, and that Computershare, as trustee, has not taken any action to compel repayment of the second-lien notes. Computershare also argued that, even if the bankruptcy filing accelerated payment of the notes, the make-whole payment would still be due under the clear language of the indenture.
As reported, under the company’s proposed reorganization scheme, the second-lien debt is to be paid in full, including accrued and unpaid interest (it’s worth noting that the Computershare adversary action also argues that a higher, default interest rate applies), but excluding the make-whole payment, through the roll-up of a proposed $1.9 billion second-lien DIP backed by certain unsecured creditors of EFIH and Energy Future Holdings.
The bankruptcy court has scheduled a June 30 hearing on approval of the DIP, which is being contested by a group of second-lien lenders that have proposed their own rival second-lien DIP for the company. Which group ultimately wins out as DIP lender is significant because under the company’s restructuring proposal, the facility is slated to be exchanged for equity in the reorganized company.
Meanwhile, as reported, on May 9 the company launched a tender offer to repurchase the second-lien notes incorporating a proposed settlement of the make-whole claim that would pay holders of the 11.75% notes $1,116.22 for each $1,000 principal amount of notes, and holders of the 11% issue $1,073.22 for each $1,000 principal amount of notes, plus an additional $50 per $1,000 principal amount of notes for early participation in the tender offer – amounts which the company said are 50% of the potential second-lien make-whole claims (see “Energy Future launches tender offer for EFIH second-lien debt,” LCD, May 12, 2014).
Holders of 35% of the notes by face value had already agreed to the settlement in a pre-petition restructuring support agreement with the company. Meanwhile, the company said in a filing with the Securities and Exchange Commission on Friday that holders of 43%, or $922.4 million of the total of about $2.2 billion of second-lien debt, have agreed to “early participation” in the settlement, the deadline for which was June 11 (see “EFIH 2nd-lien make-whole settlement nabs 43% early participation,” LCD, June 16, 2014).
The tender offer is set to expire on July 3, the company said, noting that the participation rate is therefore subject to change. A hearing on bankruptcy court approval of the settlement is scheduled for June 30.
Returning to the adversary action, the next step in the litigation process would be for the company to file a response to the adversary action with the bankruptcy court. That will eventually occur, but on a more practical level, now that the issue – which, as noted, both sides agree needs to be litigated – has been placed before the court, look for the parties to either work out a discovery and litigation schedule, as was done with respect to the first-lien debt make-whole claim (see “Parties agree to September trial on EFIH first-lien make-whole claim,” LCD, June 4, 2014), or leave it to the bankruptcy court to set a timetable for resolving the matter. – Alan Zimmerman