Advances TCEH Unsecured Noteholders' Proposal to Acquire Texas Utility, Oncor, in a Transaction Valued at Over $18 Billion
Clients of global law firm White & Case LLP won a major victory in the Delaware Bankruptcy Court on December 4 when it approved the chapter 11 plan they are sponsoring for Energy Future Holdings (EFH). The Plan is based on a proposal first architected and put forth by White & Case in early 2015, acting on behalf of an ad hoc group of unsecured noteholders of EFH subsidiary, Texas Competitive Electric Holdings Company LLC (TCEH). The ad hoc group includes Anchorage Capital Group, Arrowgrass Capital Partners, BlackRock, Centerbridge Partners, Cyrus Capital Partners, Deutsche Bank, GSO Capital Partners, Balyasny Asset Management, BHR Capital, Taconic Capital Advisors and CQS. Under the Plan, all unsecured creditors of TCEH will have the opportunity to realize a potentially substantial return on their claims by participating in the $18+ billion acquisition of EFH's indirect subsidiary, Oncor, which is the largest public utility in Texas.
If the transaction receives required regulatory approvals and is consummated, it will bring to an end one of the largest, most complex and most contentious chapter 11 cases in US history.
In approving EFH's chapter 11 plan to satisfy or repay $42 billion of debt, Judge Christopher Sontchi said that "Energy Future's operations will be left in better shape due to the reorganization strategy embodied in the chapter 11 plan" and noted that the plan was a "practical business solution to insolvency."
The case, which is the largest industrial bankruptcy in US history, had its genesis in the largest leveraged buyout in history--the $52 billion acquisition of Texas power company, TXU (n/k/a EFH) by an investor group led by KKR in 2007. The deal left the company saddled with about $44 billion of debt, about $32 billion of which was supported by TCEH's retail energy business (which includes a fleet of coal, natural gas and nuclear power plants all located in Texas), with the remainder being supported by Oncor. Declining energy prices left the company unable to service its debt load and forced it to seek chapter 11 protection in the spring of 2014. A massive, high profile struggle ensued as the company attempted to press forward with a plan supported by senior lenders of both the retail energy and public utility sides of the business that would have wiped out nearly $10 billion of junior claims against TCEH, including noteholders represented by White & Case.
The initial plan and a second version of it were derailed and abandoned as a consequence of the litigation efforts of a White & Case team led by partners Chris Shore and Thomas E Lauria. Among other defects, they established that the plan was the product of internal conflicts of interest and flawed corporate governance and that it failed to properly address billions of dollars of intercompany claims, as well as potential litigation against senior lenders for their complicity in the LBO. Recognizing the need for a prompt solution and the deadlock that seemed to paralyze the company and its other creditors, White & Case seized the opportunity to formulate a solution built on three core principles:
- Instead of gifting the material upside value of Oncor to creditors who could otherwise be paid in full or to a third party purchaser, use it as currency to settle with the purportedly out-of-the-money junior creditors of TCEH;
- To end the internecine fighting between and among the creditors of Oncor's bankrupt holding companies, EFH and Energy Futures Intermediate Holdings (EFIH), provide for them to be paid in cash in full; and
- Satisfy the $25 billion of TCEH's secured lender claims by giving them new debt equal to the value of their collateral or by letting them take direct ownership of their collateral.
These guiding principles were ultimately embodied by a plan proposed by the TCEH Ad Hoc Noteholder Group and commonly referred to by the Court and the other stakeholders as the "Lauria" plan, that provided for (1) the tax-free spin-off of EFH's retail energy business to the TCEH secured lenders and the waiver on their deficiency claim; (2) the payment in cash in full of the nearly $10 billion of debt of EFH and EFIH; (3) the acquisition of Oncor by TCEH's unsecured creditors, who would provide or arrange $12.6 billion of new capital, with the $7.1 billion of equity required for the deal to be backstopped or directly provided by White & Case's clients and their strategic partner, Hunt Consolidated, and the remaining $5.5 billion to come in as new holding company debt; and (4) the conversion of Oncor and its parent companies into a real estate investment trust.
Through an arduous process of internal negotiations between and among the TCEH unsecured noteholder group represented by White & Case, followed by mediated negotiations with the other TCEH creditor groups and the company (including its now-separately-represented independent directors), a modified version of the Lauria plan was adopted and filed by the Company in August of this year. The plan was, however, opposed by substantially all of the creditors of EFH and EFIH and litigation continued full speed ahead for another three months. A second round of negotiations conducted by Lauria largely in the hallways outside the courtroom, produced a series of settlements that were approved by the Court on November 25, giving the plan near-unanimous creditor support.
"Over time, what started out as a hostile takeover by bondholders who were owed billions of dollars, but were purportedly billions out of the money, became a fully consensual chapter 11 plan that enjoys the support not only of the company, but also essentially all of its creditors and their fiduciaries," said Lauria, who heads up White & Case's Global Financial Restructuring & Insolvency Practice. "It is truly a win/win/win/win opportunity. The TCEH secured lenders have the opportunity to get their collateral, the EFH and EFIH creditors stand to be paid in full, and the junior creditors of TCEH, instead of being wiped out, can realize the value of owning Texas' largest public utility, which will, in turn, be free of the insolvency/bankruptcy cloud that has hung over its head since it was overlevered in 2007."
In addition to Lauria and Shore, the White & Case team included: partners Michael Shepherd, Matthew Brown, Gregory Pryor, David Dreier, F Holt Goddard, Daniel Hagan, Gregory Starner, Marius Griskonis, J William Dantzler, Henrik Patel, Eric Leicht and Rebecca Farrington; counsels Kenneth Barr and Steven Lutt; and associates Charles Koster, Tamara Van Heel, Adam Cieply, Michael Deyong, Jennifer Mersing, Andrew Weisberg, William Stawell, Aaron Colodny.
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