Aurelius Sues Energy Future Unit Directors Over Loans
By David McLaughlin & Beth Jinks - Mar 21, 2013 12:01 AM ET
Energy Future Holdings Corp.’s directors and chief executive officer were sued by hedge fund Aurelius Capital Management over claims that loans made within the power producer harmed creditors.
Texas Competitive Electric Holdings Co., a unit of Energy Future, is owed more than $725 million in additional interest after making loans to the parent company for billions of dollars over five years, Aurelius said in a complaint filed in federal court in Dallas.
“The loans did not reflect a fair transaction between the companies: No unaffiliated third party would have extended such loans,” Aurelius said in the March 19 complaint. Aurelius said it owns secured loans and bonds of Texas Competitive, without disclosing the amount it holds. It became a creditor in January 2011, according to the filing.
Energy Future, formerly known as TXU Corp., was taken over in a $48 billion deal in 2007 led by private-equity firms KKR & Co. (KKR) and TPG Capital. The buyout of Dallas-based Energy Future was a bet that would have paid off had natural-gas prices increased. Instead, the prices, which set the cost of electricity in the Texas market, have fallen about 71 percent since July 2008.
Hedging contracts that Energy Future sold to shield against fluctuations in gas prices are expiring and will disappear entirely by the end of 2014, which may worsen losses. Energy Future lost $3.36 billion last year, a wider deficit than its $1.91 billion shortfall in 2011, according to datacompiled by Bloomberg.
Texas Competitive’s $1.23 billion of 15 percent, second- lien bonds due in April 2021 were unchanged yesterday at a price of 25.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Energy Future’s $2.18 billion of 10 percent first-lien bonds maturing in December 2020 rose 0.13 cent on the dollar to 113.75 cents yesterday to yield 7.6 percent, according to Trace.
The power producer faces a “material restructuring” within 12 months, Moody’s Investors Service said in a Feb. 26 note.
Deloitte & Touche LLP, Energy Future’s independent auditor, included a note in the company’s latest annual report emphasizing its debt, interest payments and ability to tackle about $3.8 billion of debt maturing at its Texas Competitive unit in October 2014. The auditor said its unqualified opinion that Energy Future’s finances are sound is “dependent upon the completion of one or more actions” the company has said it may pursue.
Those “transactions and initiatives” include debt exchanges, recapitalizations, amendments and extensions of debt, and debt-for-equity exchanges or conversions, according to Energy Future’s financial statements in its annual report.
The power producer received consents from creditors to extend the maturity date on more than $17 billion in loans in April 2011, and this year lenders agreed to exchange $1.37 billion of bonds and to amend rules governing its securities as Energy Future shifted liabilities to a subsidiary.
The cost to protect the debt of Energy Future through five- year credit-default swaps increased to 29.2 percent upfront in New York, from 28.2 percent on March 19, according to data provider CMA, which is owned by McGraw-Hill Cos. (MHP) and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves.
Allan Koenig, an Energy Future spokesman, declined to comment on the lawsuit. The company said in a 2011 letter to Aurelius that the hedge fund’s claims were unfounded and accused it of trying to manipulate the credit default swaps market to its advantage.
In the lawsuit, Aurelius said Texas Competitive has been insolvent since 2010. Defendants in the case include CEO John Young and directors of Energy Future and Texas Competitive.
Aurelius said in its complaint that the loans were made from November 2007 to this January. The average amount outstanding was $1 billion on a quarterly basis, according to the complaint.
The market was paying yields two to four times higher than what Texas Competitive was paid, Aurelius said. The interest was at least $725 million less than what Energy Future would have paid had the loans been made “for reasonably equivalent value,” according to the filing.
In August 2011, the hedge fund asked the International Swaps and Derivatives Association to determine whether Texas Competitive was insolvent, which would trigger payouts on $1.2 billion of credit-default swaps linked to the utility provider’s debt. The derivatives industry group ruled against Aurelius in that case.
The case is Aurelius Capital Master Ltd. v. Acosta, 13- cv-01173, U.S. District Court, Northern District of Texas (Dallas).
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