Energy Future bondholders face dismal swap choice, says KDP

Holders of Energy Future Holdings bonds face a dismal choice, according to independent research firm KDP, as a result of the borrower’s latest exchange offer. Energy Future Holdings, previously known as TXU, is offering to swap two of its biggest outstanding unsecured bond issues for new secured bonds and some cash. The offer represents 72% of par for the 11.25%/12% 2017 toggle notes and 79 cents in the dollar for the 10.875% 2017 notes.

This isn’t the first time the Dallas-based power provider has tried this gambit. The offer is similar to an exchange offer made last year and which was rejected by bondholders, notes KDP. What is different this time is that Energy Future Holdings says that bondholders representing 52% of the two issues have already agreed to the swap. The company says that this is already enough to strip the old notes of their covenants.

Bondholders must therefore choose either to tender their bonds, giving them a share of the new bonds, which will be secured on the company’s shares in Oncor Electric, or refuse to tender and be left holding only the old notes.

KDP reckons that the old notes could be worth 20-30 points less than they are today given their lack of covenant protection and their subordination to the new debt. The research firm believes that a more comprehensive restructuring is inevitable, given that $27 billion of Energy Future’s bonds and loans mature in 2014 and 2015.