Energy Future to scrap current reorg deal; sees potential new offers


Energy Future Holdings‘ pre-arranged reorganization plan, negotiated by the company prior to its bankruptcy filing, is, for all intents and purposes, dead.


During a brief status update that preceded this morning’s omnibus hearing in the case in Wilmington, Del., attorneys for the company told Bankruptcy Court Judge Christopher Sontchi that while the restructuring support agreement backing the pre-arranged plan has not yet been terminated, “it remains terminable.” The attorney said he expects in coming days that parties to the RSA will either move to terminate the agreement, or the agreement will be amended to terminate by its own terms on Aug. 8, giving the parties a few weeks to work on a replacement deal (see “IRS support for Energy Future’s tax deal is the key to reorg,” LCD, May 1, 2014, for a detailed description of the pre-arranged reorganization deal).


Either way the termination of the company’s current pre-arranged reorganization scheme as embodied in the RSA is the result.


The attorney blamed the disintegration of the pre-arranged deal on the increased trading prices of Energy Future debt in secondary markets since the company’s bankruptcy filing. He said he did not know whether the increase in debt prices would be permanent or temporary, or even the reasons behind the increasing prices, but he pointedly noted, “Trading prices do impact behavior.”


As a result of the increased prices, “parties have been reaching out to the company to suggest transactions that were not previously available to it,” he said, citing the recently sweetened offer from NextEra to acquire the company’s regulated utility, Oncor, as an example (see “NextEra, noteholder group up offer for Energy Future Holdings,” LCD, July 17, 2014, also reported on, for a detailed description of the NextEra offer).


Going forward, the attorney said, Energy Future intends to conduct a process to “vigorously pursue” new potential transactions.


As for the NextEra offer, the attorney characterized it as “very promising,” and said discussions over it would continue. Toward that end, he said the company would abandon its proposed $1.9 billion second-lien DIP for unit Energy Future Intermediate Holdings, the intermediate holding company for Energy Future’s 80% interest in Oncor.


As reported, that DIP, which was to have been provided by a combination of certain holders of unsecured toggle notes at EFIH and holders of unsecured debt at parent Energy Future Holdings, was to be converted into equity in the reorganized company and was a key feature of the pre-arranged deal negotiated by the company. But as also reported, the NextEra deal would, depending upon how it shakes out, either make such a DIP unnecessary, or would replace that proposed DIP with a different second-lien DIP facility, provided by NextEra and a group of EFIH second-lien lenders, that would be incorporated into the overall merger transaction.


One other area of note that generated discussion during the status update portion of the hearing was the anticipated structure of any contemplated reorganization scheme and whether it would need to be based upon a tax-free spin-off of unit Texas Competitive Electric Holdings, the intermediate holding company for the company’s unregulated power producing and retailing operations. As reported, addressing the complex tax implications of any reorganization have been a major sticking point as the company has sought to strike a deal among its creditors.


In opting for the tax-free spin-off in the pre-arranged plan scheme, Energy Future’s attorney said that the company had “explored the universe of potential structures.” But in comments delivered after the company provided its status update, an attorney for the indenture trustee for second-lien lenders at TCEH suggested that a transaction structure not based on retaining tax-free attributes for TCEH could be accretive by $2-3 billion of the unit, creating residual value for second-lien holders. – Alan Zimmerman




Energy Future Holdings’ TCEH debt weakens in active trading

Debt backing bankrupt Energy Future Holdings’ subsidiary Texas Competitive Electric Holdings 

Over in the loan market, the EFH pre-petition term debt, which sits at TCEH, slid to a 78.5/79 context, from levels bracketing 80 yesterday, sources said. Moreover, that’s down from an 84 context two weeks ago amid hopes for improved recoveries as investors learned of an intercompany loan of $774 million by the unit to the parent company

Press reports circulated with news that TCEH first-lien lenders plan to withdraw support for the EFH restructuring plan. The lenders plan to terminate their support because of higher valuation at the Energy Future Intermediate Holdings entity, and disclosure of the intercompany loan provided further pause, according to a Debtwire report, citing unnamed sources. – Staff reports


Bankruptcy: Revel nets OK for asset-bidding procedures; sale hearing seen Aug. 8

The bankruptcy court overseeing the Chapter 11 proceeding of Revel AC Inc. approved bid procedures for the company that would see qualified bids submitted by Aug. 4, an auction, if one is required, on Aug. 7, and a sale hearing on Aug. 8, according to a court order.

Letters of intent to bid are due by July 18, the order said.

The auction would take place at the New York offices of the company’s counsel, White & Case, and the sale hearing at bankruptcy court in Camden, N.J.

According to the July 14 order, lenders under the company’s DIP facility and its pre-petition first-lien credit agreement will be permitted to credit bid.

As reported, Revel filed for Chapter on June 19, the company’s second Chapter 11 in just over a year. As reported, the company filed a prepackaged Chapter 11 on March 25, 2013, emerging on May 21, 2013 with $350 million in exit financing comprised of a $75 million first-lien revolver and a $275 million second-lien term loan with interest payable in-kind.

Those facilities were subsequently amended so that, at the time of the current bankruptcy filing, the first lien facility was comprised of a $100 million revolver, split into two tranches (a $25 million A-1 tranche at L+600 and a $75 million A-2 tranche at L+650), and a $50 million tranche B term loan at L+900, payable in-kind.

As of the date of company’s bankruptcy filing, there was $137 million outstanding under the first-lien facility and $310 million outstanding under the second-lien term loan.

At the time of filing its petition, the company said it expected to continue normal business operations throughout the Chapter 11 process, but the company also warned employees that if it was unable to find a buyer it could begin to close operations as soon as Aug. 18.

That said, according to an affidavit submitted in the case in connection with the company’s Chapter 11 petition by Shaun Martin, the company’s chief restructuring officer, as part of the company’s pre-petition marketing process it “facilitated due diligence with potential buyers and engaged in negotiations with parties that submitted letters of interest.” Martin added that the company made “substantial progress with certain parties, including engaging in prolonged negotiations over an asset-purchase agreement and post-petition financing with one such party.”

Martin said that while the company did not complete a deal, it believed that “the expressions of interest received and negotiations conducted during [the market process were] promising indications of the value of the debtors’ assets,” and that the court-supervised bidding process would ultimately lead to a sale of substantially all of the company’s assets.

Still, as exemplified this week by the news that Trump Plaza expects to close down in the fall, the Atlantic City casino market is, at best, undergoing hard times.

Indeed, a report from the Associated Press published at the time of the company’s bankruptcy filing noted that while it was uncertain what the company was worth, any sale in bankruptcy would likely be at a steep discount, noting that some Wall Street analysts said last month that $300 million was too high a price. One union with which the company has been at odds recently has said the company was worth between $25-73 million, the AP said, adding that the Seminole Tribe of Florida had expressed an interest in the company “if the price is right.” – Alan Zimmerman


LightSquared reaches deal with Ergen on reorganization plan, Harbinger less than thrilled

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LightSquared has reached an agreement with Charles Ergen on the terms of a consensual reorganization plan, according to court filings.

Bankruptcy Court Judge Robert Drain, who is the court-appointed mediator in the case, said in a filing yesterday with the Manhattan bankruptcy court that Ergen and SPSO, the investment vehicle used by Ergen to acquire $844 million of LightSquared’s senior bank debt, “has now concluded a good-faith negotiation by agreement with the plan sponsors on the key terms of SPSO/Ergen’s treatment under a Chapter 11 plan as well as new funding that is fundamentally consistent with the consensual plan terms previously negotiated by the other parties.”

Further details were not provided. Reuters said the company would seek to file a plan with the bankruptcy court within a week, and was targeting an August plan hearing.

As reported, Drain had previously reported that the parties in the case, with the exception of Ergen, had reached an agreement on a proposed plan. In an unusual court filing last month describing the results of mediation, Drain slammed Ergen, saying that he and SPSO did not participate in the mediation “in good faith” and “wasted the parties’ and the mediator’s time and resources.” (See “LightSquared reaches deal on plan; mediator slams holdout Ergen,” LCD, June 30, 2014).

Under the proposal that came out of the mediation at that time, J.P. Morgan Chase, Cerberus Capital and Fortress Investment Group agreed to contribute about $1.75 billion of new money to the company, with the company raising an additional $1.3 billion through a debt issuance. The J.P. Morgan/Cerberus/Fortress group would receive 74% of the equity in the reorganized company, with the company’s current equity owner, Philip Falcone’s Harbinger Capital, retaining 12.5% of the new equity.

The company’s senior lenders, meanwhile, were to be repaid in full, in cash, with the exception of Ergen, who was to receive $470 million in cash and a $492 million unsecured note, for his claim.

According to report yesterday from Bloomberg, an attorney for a special committee of LightSquared said at a status conference held yesterday at bankruptcy court that under the revised deal, the contemplated $1.3 billion of debt financing would be provided by Ergen, who would convert his senior debt claim, which Ergen asserts is about $1.3 billion, into $1 billion of new debt, and provide an additional $300 million in new financing.

The Bloomberg report also said that Harbinger appeared less than thrilled with the new plan, quoting one Harbinger attorney as saying the Ergen settlement was a “stunning reversal,” and that Harbinger’s position has been that Ergen should not be part of the company’s capital structure after it emerges from Chapter 11.

According to Drain’s filing yesterday, the deal with Ergen resulted from Drain’s continued involvement in mediation the official final mediation session, which was held on June 23. In his filing yesterday, Drain noted that despite the failure of the mediation to achieve a fully consensual deal, he had been “prepared to continue as mediator if the parties sought my assistance on remaining open issues, particularly as to issues pertaining to the one party, SPSO/Charles Ergen, with whom the mediation had not successfully concluded.”

Drain added, “I did continue in that role.”

It is worth nothing that Drain’s description of his ongoing role, however, is slightly different than the role Drain described for himself on June 27 when he initially reported on the results of the mediation. At that time, Drain said he had participated in several phone calls following the final mediation session, which occurred on June 23, “regarding details of the agreements reached during the mediation,” adding he was “prepared to continue that role if the parties seek it.”

But, Drain emphasized at the time, while details remained to be worked out, “The global mediation … has ended.”

Last, but not least, it is unclear what effect, of any, the settlement will have on the $4 billion civil RICO lawsuit Harbinger filed against Ergen and SPSO last week in Colorado (see “Harbinger RICO suit against DISH, Ergen over LightSquared seeks $4B,” LCD, July 9, 2014). A core element of that lawsuit is the allegation that Ergen’s activities in acquiring the LightSquared debt and its actions during the company’s bankruptcy were part of a scheme to eliminate Harbinger’s influence as the company’s equity owner over the company in order to acquire the company for less than its fair value. – Alan Zimmerman



Bankruptcy: Genco Shipping & Trading emerges from Chapter 11


Genco Shipping & Trading yesterday emerged from Chapter 11, the company announced.

The bankruptcy court overseeing the company’s bankruptcy confirmed the company’s reorganization plan on July 2, after turning back a valuation challenge from an official equity committee that was appointed in the case.

According to the company, through the Chapter 11 process it reduced its outstanding debt by approximately $1.2 billion, reduced its annual interest payment obligations by more than $40 million, and eliminated over $192.8 million annually in amortization payments.

The company’s prepackaged reorganization plan provided for lenders under the company’s 2007 credit agreement, with outstanding claims of about $1.056 billion, to receive 81.1% of the reorganized Genco equity, subject to dilution by stock (1.8% of the new equity) and warrants issued in connection with a management incentive plan.

Convertible noteholders, meanwhile ($125 million of 5% notes due 2015), were to receive 8.4% of the new equity, again subject to dilution.

In addition, the plan called for a $100 million rights offering for the remaining 8.7% of the new equity, with eligible 2007 facility lenders having the right to participate in up to 80% of the rights offering, and eligible convertible noteholders having the right to participate in 20% of the offering. The rights offering is to be backstopped by supporting lenders and noteholders, respectively. – Alan Zimmerman


Harbinger RICO suit against DISH, Ergen over LightSquared seeks $4B

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Harbinger Capital Partners yesterday filed a lawsuit against Charles Ergen and DISH Network seeking as much as $4 billion in damages, alleging that Ergen’s acquisition of senior debt of LightSquared and subsequent actions to influence the company’s Chapter 11 proceedings to position DISH to acquire the company on the cheap constituted “civil racketeering” under applicable RICO laws, “involving mail and wire fraud, bankruptcy fraud, tortuous interference, and abuse of process.”

RICO, which stands for Racketeering Influenced and Corrupt Organization Act, was originally designed to be used against organized crime, but it has been used over the years, particularly its provisions providing for a private civil cause of action, in the context of alleged corruption and white-collar criminal cases.

The suit was filed in federal court in Colorado. In addition to Ergen and DISH, named defendants include hedge fund manager Stephen Ketchum and his investment company, Sound Point Capital, which allegedly operated as a front man in Ergen’s acquisition of LightSquared’s senior lender claims in order to hide Ergen’s involvement.

“Defendants’ conduct was, as the bankruptcy court overseeing LightSquared’s Chapter 11 cases found, an affront to the Chapter 11 process, in which defendants abused the bankruptcy proceedings, withheld crucial evidence, and engaged in a ‘troubling pattern of noncredible testimony,’” the lawsuit alleges. “Defendants wrongfully and deceptively created chaos in the bankruptcy proceedings so that Harbinger would lose control of the LightSquared board to which it was contractually entitled.”

As laid out in the lawsuit, Harbinger explained that it had spent billions of dollars in developing LightSquared’s wireless services network, and that to protect this investment it had entered into a stockholders’ agreement with the company and other shareholders that gave Harbinger “expansive protections and management rights … including the ability to appoint and remove a majority of directors and committees, chair all committees, and make material management decisions.” Harbinger asserted that this power over the company’s management “represent a significant premium independent of, and incremental to, the value of Harbinger’s equity alone.”

The suit said that Ergen and the businesses he controls, EchoStar and DISH, “have been on a continuing quest to acquire additional spectrum assets and for years have coveted the spectrum assets held by LightSquared.”

And after LightSquared filed for Chapter 11 on May 14, 2012, the complaint alleges, “defendants saw their opportunity.”

The alleged RICO scheme, as sketched out in the complaint, involved Ketchum’s investment company, Sound Point, creating a front company, SPSC, to “use Ergen’s funds to secretly purchase a majority position in the [senior bank debt of LightSquared] that would allow [Ergen] to block Harbinger’s control over LightSquared and force a DISH-sponsored bid to acquire LightSquared’s assets at a discount and simultaneously repay Ergen at a profit.”

Ergen, through SPSO, ultimately purchased roughly $844 million of the senior debt.

At the same time as Ergen was acquiring the debt through the latter half of 2012, the complaint asserts, Harbinger was seeking to raise financing and negotiate a reorganization plan with its creditors. In connection with this effort, Harbinger in early 2013 entered into an agreement with LightSquared creditors to extend the exclusive period during which only LightSquared could file a reorganization, agreeing that if negotiations were unsuccessful the company would explore a sale of assets (see “LightSquared reaches deal with lenders, nets exclusivity extension,” LCD, Feb. 14, 2013).

The complaint alleges that in the wake of this agreement Ergen was concerned that Harbinger would successfully obtain the financing for a reorganization plan. According to the complaint, Ergen believed that if Harbinger lost control of the company’s board, “LightSquared would cave to the influence of powerful creditor constituencies, now dominated by SPSO, who favored a quick payout over a plan that realized LightSquared’s true value.”

“Desperate to fulfill [its] scheme,” the complaint asserts, Ergen and DISH “moved quickly to remove Harbinger from the equation.”

To accomplish this, according to the suit, Ergen on May 15, 2013, made a bid to purchase LightSquared through an entity through an acquisition entity named LBAC (L-Bandwidth Acquisition Corp.) that, “while sufficient to pay off in full the holders of [LightSquared debt], including Ergen, was for far less than what Ergen knew to be the true value of the assets, and was a bid Ergen never intended to succeed.”

The suit alleges that after making the bid, Ergen next leveraged his influence with other LightSquared lenders to cause the group to charge LightSquared with failing to properly consider the LBAC bid and to fulfill its fiduciary duties to creditors (see “LightSquared ignored $2B Dish bid, broke agreement, lenders say,” LCD, June 19, 2013).

“Unbeknownst to the parties and the bankruptcy court, however, defendants were withholding critical documents that conclusively established that defendants knew full well that the LBAC bid represented a mere fraction of LightSquared’s true value, and thus that Harbinger properly had opposed the transaction,” the complaint states.

Other holders of the senior debt, meanwhile, were eager for a “quick payout,” and as soon as the company’s exclusivity period terminated filed their own proposed reorganization plan calling for the company to sell its assets to the highest bidder, with DISH serving as a stalking-horse bidder with a $2.2 billion bid. Among other things, the lenders proposed plan required lenders to terminate negotiations on any alternative plan, even though, in the words of the complaint, “defendants secretly planned to cancel that bid and drive the price even lower.”

To eliminate Harbinger’s role in the company, according to the suit, Ergen and DISH, “now supported by the hoodwinked ad hoc secured group [comprised of senior lenders other than Ergen], forcefully argued that LightSquared could not be trusted to fairly conduct an auction with Harbinger at the helm. Defendants sought to create the impression that Harbinger’s interests — to maximize the estate’s distributable value – conflicted with the estate’s interests, which, defendants asserted, would be served by embracing the stalking horse bid.”

That resulted in the bankruptcy court ordering the appointment of a special committee “imbued with complete power over the LightSquared operations that mattered most, including decision making related to a sale or reorganization of LightSquared and actions related to regulatory approval.”

But according to the suit, unknown to his fellow senior debt holders, Ergen never intended to go through with the deal, and after the special committee was appointed, LBAC cancelled its stalking-horse bid, “giving a pretextual decision for the cancellation.” (see “Dish could drop $2.2B LightSquared bid tonight, ahead of trial,” LCD, Jan. 7, 2014).

Among other things, the complaint asserts, the financial advisor for the ad hoc secured lender group in the case (comprised of senior lenders other than Ergen) “later testified that absent defendants’ machinations it likely would have reached a consensual plan of reorganization with Harbinger.”

Regardless, the complaint states, “With plan negotiations in shambles, defendants still in control of the [senior lender debt], and LightSquared’s quickly evaporating financing pressing it ever closer to the forced liquidation that defendants had always envisioned, Harbinger resigned from its now worthless board seats to explore alternative ways to salvage its billions in investments in the company.” As was widely reported, Philip Falcone and four other Harbinger-appointed directors resigned from the company’s board on June 12.

In wrapping the RICO allegations around the case, the complaint alleges that in implementing this scheme Ergen and his co-defendants “tortuously interfered with Harbinger’s rights under the stockholders’ agreement, committed bankruptcy fraud and abuse of process, and obstructed justice by withholding critical evidence that conclusively established that LightSquared’s assets were so valuable that Harbinger would have abandoned its fiduciary duties by not opposing [Dish’s] low stalking horse bid.”

Further, the complaint alleges, Ergen and other defendants “provided false testimony and made numerous misrepresentations” to the bankruptcy court concerning Ergen’s acquisition of LightSquared senior debt claims and LBAC’s stalking horse bid.

“Abusing the judicial process to corrupt the legal rights of others is part of Ergen’s modus vivendi,” the suit alleges, adding, “Practices of the kind defendants utilized here have led numerous courts in case after case to sanction Ergen’s companies for spoliation, contempt, and even perjury.”

Many of the facts alleged in the suit mirror the facts of a prior Harbinger lawsuit against Ergen in bankruptcy court litigated earlier this year regarding whether Ergen and SPSO’s purchase of the LightSquared debt claims were fraudulent efforts to evade the debt indenture prohibition against competitors owning the debt. At issue in that case was whether Ergen’s purchases were made on his own behalf as a personal investment, or whether they were made on behalf of DISH. That said, it’s worth noting that some of the allegations in Harbinger’s current lawsuit refer to allegedly false testimony provided in that trial.

The bankruptcy court ruled in that case that while Ergen’s later purchases of LightSquared debt were clearly on behalf of DISH, his earlier purchases via SPSO did not technically violate the debt indenture, but were clearly an “end run” around them that showed a lack of good faith. Bankruptcy Court Judge Shelley Chapman ruled, as a result, that while this conduct was not egregious enough to disallow Ergen’s claims in the case, it was enough to equitably subordinate them is any eventual reorganization plan.

At the same time, however, Shelley refused to confirm LightSquared’s reorganization plan because it treated Ergen’s entire claim differently than other senior lender claims.

Since then, the company has settled on a new reorganization plan that would repay Ergen partially in cash, and partially with an unsecured promissory note (see “LightSquared plan due July 14; confirmation hearing set for Aug. 25,” LCD, July 8, 2014).

Meanwhile, with respect to the Colorado case, under federal court rules, the named defendants in the lawsuit are required to answer the complaint within 20 days. As a practical matter, of course, such responses are frequently significantly delayed as parties get their arms around a case. Responses generally take the form of a factual response to the complaint’s allegations, known as an “Answer,” or a motion to dismiss the complaint on any number of procedural or legal grounds. – Alan Zimmerman



Bankruptcy: Energy Future delays DIP hearing, cites ‘beneficial developments’


Energy Future Holdings has postponed consideration of several key motions in its bankruptcy case, including approval of the proposed $1.9 billion second-lien DIP facility at its Energy Future Intermediate Holdings (EFIH) unit, “to provide the time needed to address … postpetition developments potentially beneficial to” the bankrupt company.

In addition to consideration of the proposed second-lien DIP, the company also postponed consideration of the proposed settlement of a make-whole claim asserted by EFIH’s existing second-lien debt holders and the approval of the proposed restructuring support agreement backing the company’s reorganization scheme, of which the make-whole claim settlement and proposed second-lien DIP were integral parts.

The hearings on the DIP and the make-whole claim settlement were scheduled for July 10 and 11, respectively, while the hearing on the RSA was scheduled for July 18.

The company disclosed the postponement of the hearings in a notice filed yesterday with the bankruptcy court in Wilmington, Del.

Energy Future Holdings did not provide any details of the beneficial developments in the notice, but said it would provide a comprehensive status report at the start of an omnibus hearing scheduled for July 18.

The company also said in the notice that it was continuing discussions with creditors, specifically noting that it “remains committed to the value-maximizing goals embodied in the RSA transactions” and that it was “reaching out to and coordinating directly with the proponents of and objectors to” the second-lien DIP, the make-whole settlement, and the RSA.

The company also said it needed the time “to respond constructively to the Bankruptcy Court’s observations at the close of the July 1, 2014 hearing.”

The hearings have not yet been rescheduled.

The postponement underscores the dilemma in which the company finds itself as it seeks to develop and implement a global restructuring for its complicated capital structure.

As reported, at the time the company filed for Chapter 11 at the end of April, Energy Future Holdings had in place a pre-arranged reorganization plan that provided for, among other things, a $1.9 billion second-lien DIP to be funded 91% by holders of EFIH’s so-called toggle notes, including Avenue Capital and York Capital, and 9% by holders – primarily Fidelity – of unsecured debt at the parent company level. The proceeds of the second-lien DIP were to be used to repay holders of the company’s existing second-lien debt, including a proposed settlement of the make-whole claim that would pay holders 50% of the roughly $700 million payment. Upon the company’s emergence from Chapter 11, the DIP would be converted into about 62% of the reorganized company’s equity (see “Energy Future DIP details; loans to roll up EFIH 1st- and 2nd-liens,” LCD, April 30, 2014).

That plan came under fire, however, from several different directions. A majority of second-lien lenders, for example, rejected the proposed make-whole settlement at the heart of the plan, challenging the tender offer launched by the company to implement the settlement and instructing the indenture trustee for the debt to file an adversary action in the case seeking a court ruling on whether the make-whole payment is due (see “EFIH 2nd-lien noteholders file suit seeking make-whole claim payment,” LCD, June 17, 2014).

Meanwhile, a group of second-lien lenders proposed an alternative second-lien DIP for the company that would see the group covert the loan into about 62% of the company’s reorganized equity, thus denying the unsecured creditors the full ownership of the reorganized company that their own DIP proposal would deliver, and which was a key part of the company’s global reorganization scheme. With lower pricing and fees than the toggle/unsecured noteholders’ proposed DIP, the alternative proposal delayed quick approval of that DIP, and the hearing was reset to June 30 (see “Several key matters on tap for Energy Future at tomorrow’s hearing,” LCD, June 4, 2014).

Then, prior to that hearing, the second-lien lender group combined with energy company NextEra to propose an alternative reorganization plan for EFIH that would, among other things, repay second-lien lenders in full, including the entire make-whole claim, and repay toggle noteholders in full with a combination of cash and equity. The company rejected the offer (see “Energy Future rejects joint DIP/revamp bid by lenders with NextEra,” LCD, June 24, 2014), and while the DIP hearing got underway on June 30, the court the next day put off consideration of the DIP until July 10. – Alan Zimmerman


TXU debt trades as key hearing progresses over 2nd-lien recoveries


Energy Future debt was on the move as a key hearing progressed.

EFIH 10.25% second-lien notes due 2015 rose roughly three points, to a 15 bid.

Bids for the company’s $1.75 billion of 11.75% second-lien notes due 2022 were at 123.75 today, off a market of 126/127 hit late last week, sources said. These bonds were at 118.5/119.5 at the time of the April 2014 bankruptcy filing.

The company’s bank debt was more or less unchanged. The power producer’s extended term loan due 2017 (L+450) was at 82/82.5. The company’s non-extended term loan due 2014 (L+350) was bid at 81.875, sources said.

The hearing scheduled for today in Wilmington, Del., will likely determine, to a large extent, the ultimate treatment of both creditor classes in the company’s eventual reorganization plan. It is worth noting that while the issues at today’s hearing each present distinct upsides for each creditor class, the potential downside recovery risks are somewhat muted, perhaps explaining how levels on each would rise despite the creditors being in conflict with one another.

At issue in the hearing is whether to approve a proposed $1.9 billion second-lien DIP for Energy Future Intermediate Holding (EFIH) from the company’s unsecured creditors, primarily holders of the so-called EFIH toggle notes. As reported, EFIH controls the company’s 80% interest in regulated utility Oncor.

Together with the already-approved $5.4 billion first-lien EFIH DIP, the second-lien DIP would be used to roll-up second-lien debt and provide the company with additional liquidity.

The proposed second-lien DIP is part of the company’s pre-arranged reorganization plan that would, in effect, see the toggle noteholders, together with Fidelity, a holder of the unsecured debt at parent Energy Future Holdings, acquire nearly 100% of the equity in the reorganized company (following the spin-off of Texas Competitive Energy Holdings), with the DIP converting into about 62% of the equity in reorganized Energy Future Holdings, EFIH’s parent (creditors would acquire the remaining 38% of the equity via direct distributions under a reorganization plan).

Further, under the proposal the company’s current second-lien lenders, owed roughly $2.1 billion, would be repaid in full, including accrued and unpaid interest, but excluding any make-whole amount that holders have asserted is due on the debt as a result of early repayment. Rather, second-lien holders have been offered a settlement of 50% of the asserted make-whole claim via a tender offer that expires on July 3 (early participation in the proposed settlement drew holders of only 43% of the notes).

As reported, however, second-lien lenders have joined with NextEra Energy to propose a rival $2.3 billion second-lien DIP as part of a larger plan under which NextEra would acquire EFIH in order to bring it out of Chapter 11. Under that plan, second-lien lenders would be repaid in full, including the entire make-whole claim. Toggle noteholders, meanwhile, would receive a combination of cash and equity that would repay them in full.

Among other things, the second-lien/NextEra proposal is at a lower interest rate, and charges lower fees. – Abby Latour/Alan Zimmerman

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more


LightSquared reaches deal on plan; mediator slams holdout Ergen

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The bankruptcy court judge overseeing the mediation in LightSquared’s Chapter 11 case reported that all of the parties in the case, with the exception of Charles Ergen and his investment vehicle, SPSO, “have agreed on the key business terms of a Chapter 11 plan for the debtors that should be confirmable without the support of the one party, SPSO, which has not agreed.”

According to a June 27 report filed by the mediator, Bankruptcy Court Judge Robert Drain, Ergen and SPSO did not participate in the mediation “in good faith” and “wasted the parties’ and the mediator’s time and resources.”

Drain’s report detailed neither the terms of the Chapter 11 plan nor the reason for his determination that Ergen did not participate in good faith, except to state that Ergen left the last of three scheduled day-long mediation sessions, specifically the one held on June 23 that Drain had specified would be the final session, without Drain’s “permission.”

Drain said that after Ergen left, Drain told Ergen’s counsel that he would be willing to continue the mediation despite his earlier ruling that June 23 would be the final session “if SPSO made a certain proposal by 5:00 p.m. on June 24, 2014.”

Drain added, however, “Such proposal was not made.”

Drain said that since June 23, he has participated in several phone calls regarding the details of the agreements reached during mediation, and was willing to “continue in that role if the parties seek it,” but he also stated, “[t]he global mediation … has ended.”

As previously reported, SPSO is the investment vehicle Ergen used to purchase some $844 million of LightSquared’s senior lender claims prior to the company’s Chapter 11 filing. Whether Ergen fraudulently acquired those claims on behalf of DISH, however, to sidestep non-compete provisions of the debt indentures has been a hotly contested issue in the case. A trial was held in March, with Bankruptcy Court Judge Shelley Chapman ruling in early May that while Ergen’s claims would be allowed in the case, they would be subject to equitable subordination in an amount to be determined.

As a consequence of those findings, however, Chapman denied confirmation of the company’s proposed reorganization plan (see “LightSquared plan denied; judge gives lawyers 2 weeks to make deal,” LCD, May 8, 2014). Chapman gave the parties two weeks to work out a revised reorganization plan, after which she appointed Drain as a mediator.

Drain’s calling out Ergen by name in the mediation report as acting in bad faith is unusual, to say the least. “I understand the seriousness of this assertion,” Drain said in his report, adding, “[i]t is unique in my experience as a mediator in a field where the parties are known to assert their positions aggressively and sharp elbows in negotiations, although not welcome, are tolerated.” – Alan Zimmerman


Bankruptcy: Energy Future rejects joint DIP/revamp bid by lenders with NextEra


A group of second-lien lenders of Energy Future Holdings’ unit Energy Future Intermediate Holdings has joined with NextEra Energy Inc. to propose an alternative restructuring proposal for the company based on a proposed $2.3 billion second-lien DIP for the company.

The proposal would result in an eventual emergence from Chapter 11 and merger that would leave NextEra with 100% ownership of Energy Future (following the company’s tax-free spin-off of its Texas Competitive Electric Holdings unit). The restructuring proposal would, among other things, repay both the company’s second-lien lenders and holders of EFIH’s so-called unsecured “toggle notes” in full (including the disputed second-lien lender make-whole claim) with a combination of cash and equity.

In court filings, the second-lien group and NextEra contend that their proposal is “superior both in cost of financing and value to EFIH’s estate and its creditors” compared with the rival $1.9 billion second-lien DIP proposal from the company’s unsecured creditors, which is backed by toggle noteholders (who are providing 91% of the unsecured DIP commitment) and unsecured debt holders of parent Energy Future Holdings, primarily Fidelity (who are providing 9% of the unsecured DIP commitment).

Nonetheless, according to a June 24 objection to the unsecured holders’ second-lien DIP filed by the second-lien lenders and NextEra with the bankruptcy court, the company has rejected the second-lien/NextEra proposal, and intends to move forward with the unsecured holders’ proposal.

A hearing on the second-lien DIP is scheduled for June 30 in Wilmington, Del.

The rival DIPs
As reported, when it filed for Chapter 11 on April 29, the company said it had agreed to a pre-arranged plan under which, among other things, Energy Future would spin off TCEH in a tax-free transaction and EFIH would pay off its first- and second-lien debt via a roll-up into about $7.3 billion of DIP financing. Toward that end, the pre-arranged plan provided for a $5.4 billion first-lien DIP, which has already been approved, and the second-lien DIP that is currently on the table.

As originally proposed, the second-lien DIP backed by the toggle noteholders/Fidelity group was priced at 8% per year, and would convert into a 64% equity stake in the reorganized company upon emergence. The company’s plan also called for the remaining 36% of the equity to be distributed 98% to toggle noteholders, 1% to Energy Future unsecured debtholders (i.e., Fidelity), and 1% to existing Energy Future equityholders.

Thus, beyond simply providing the company with post-petition financing, the second-lien DIP is an essential piece of the company’s proposed restructuring scheme inasmuch as it serves as a vehicle to pay off senior lenders, deliver an equity recovery to toggle noteholders, and provide a recovery to Fidelity – a significant creditor of the company throughout the capital structure – on account of its unsecured debt holdings in Energy Future Holdings.

One monkey wrench in the proposed plan, however, was the payoff to the existing first- and second-lien lenders (comprised of $3.48 billion of 10% first lien notes due 2020; $507.7 million of 6.875% first-lien notes due 2017; $1.75 billion of 11.75% second-lien notes due 2022; and $406.4 million of 11% second-lien notes due 2021) via the roll-up, and whether make-whole payments, asserted in the amount of roughly $700 million each by first- and second-lien noteholders, respectively, would be due as a result.

The company offered settlements of the claims to holders that would pay roughly 50% of the asserted make-whole claims, but participation has been less than robust, and the matter remains a subject of hotly contested disputes that have not only pitted the company against its first- and second-lien lenders, but also have set those lenders against each other as they seek to sort out their intercreditor rights as the disputes are litigated (see “EFIH first-lien lawsuit opens new front in make-whole claims fight,” LCD, June 24, 2014).

In any event, into this already complicated landscape, a group of second-lien lenders on March 12 proposed an alternate $1.9 billion DIP to the company, priced at 7% per annum and with significantly lower fees, with participation open to all second-lien lenders. The alternate DIP would convert into 62% of the reorganized company’s equity.

Apart from the merits of each DIP in terms of which post-petition financing deal is superior, the emerging battle amounts to whether the toggle noteholders can, if effect, use the second-lien DIP to cram-up existing second-lien lenders (including avoiding the make-whole claim) and acquire the company’s equity, or whether existing second-lien lenders can use the DIP to cram down the toggle noteholders, and retain a significant chunk of equity for themselves, including the make-whole claim.

If nothing else, the emergence of the alternate DIP but the brakes on quick approval of the original unsecured holders’ proposed DIP. So, which the EFIH first-lien DIP has been approved, as has the TCEH $44.475 billion DIP, a hearing on approval of the second-lien facility is now set for June 30.

The second-lien/NextEra proposal
Meanwhile, ahead of the contested DIP hearing, the company on May 30 launched a process, ostensibly to evaluate the rival DIP proposals, under which it asked the potential DIP lenders to submit best and final offers for a second-lien DIP facility.

According to the second-lien lenders/NextEra objection, on June 18 they submitted their joint proposal to the company, which they amended on June 22 in response to certain comments.

NextEra committed to fund at least $1 billion of the facility.

The amended second-lien/NextEra DIP facility would be priced at 6% per annum. $1.6 billion of the facility would constitute new money, while $700 million would be used to roll up most of the remaining second-lien debt, leaving $100 million of second lien debt in place that would ultimately convert to equity.

Together with the DIP conversion, NextEra and second-lien lenders would wind up with 68% of the equity in the reorganized company.

Further, under the second lien/NextEra restructuring proposal submitted alongside the DIP, the EFIH toggle notes would be repaid in full with a combination of cash and equity, with toggle noteholders receiving the same share of pre-conversion equity that they would receive under the company’s pre-arranged reorganization plan, namely, 98%. Similarly, Fidelity would receive 1% of the pre-conversion equity (same as in the original proposal), along with cash that is at least $20 million more than the cash it would receive under the company’s proposal.

The second-lien/NextEra proposal is based on a total reorganized equity value of the company of $3.6 billion, translating into an equity distribution to toggle noteholders, who are owed about $1.4 billion, valued at $1.175 billion.

Meanwhile, the unsecured holders have also submitted a revised second-lien DIP to the company. According to the second-lien/NextEra objection, however, the changes from the earlier proposal were “modest,” although details disclosed in the heavily redacted filings about the revised proposal are scant.

That said, the filings do show that the unsecured holders lowered the pricing on their DIP proposal to 6.25% from its initial 8%. In addition, the unsecured holders’ DIP is based on a reorganized equity value for the company of $3.325 billion, or $275 million less than the second-lien/NextEra proposal. – Alan Zimmerman