Written by Cathleen Bonge
Edited by Sarah Mejia
Some of the most well-known names in finance are arguing over their holdings in Texas utility company Energy Future Holdings. The creditors of Energy Future are competing for funds from their potential bankruptcy filing, in which Energy Future owes more than $40 billion to their creditors. In a bankruptcy situation, stakeholders such as investment groups including KKR & Co, TPG and Goldman Sachs Group Inc’s private equity arm can lose their stakes, so investment groups are pushing to retain some ownership. Each stakeholder, including investment companies and creditors, is affected by Energy Future’s decision about filing bankruptcy; this decision will determine stakeholders’ future repayments. Different decisions made by Energy Future will result in different payout plans. The creditors and private-equity groups such as Apollo Grand Management LLC, Oaktree Capital Management LP and Centerbridge Partners LP are creating large hedge funds against competitors such as Avenue Capital Group, York Capital Management, Third Avenue Management LLC and GSO Capital Partners regarding Energy Future’s plans for bankruptcy.
The deadline for Energy Future to pay $270 billion to junior bondholders at Texas Competitive Electric, a subsidiary of Energy Future, was November 1. The money from this payout went towards bondholders ranked behind senior creditors at Texas Competitive Electric. However, if Energy Future filed bankruptcy before November 1, they could have avoided this payout. Moody’s Investors Service gave Energy Future until the end of the year to decide if they would file for bankruptcy and restructure the company (Moody’s). Energy Future, JP Morgan and Citigroup are beginning to discuss the possibility of a $2 billion loan in order to avoid bankruptcy. Energy Future is working to make deals with multiple creditors to pay off the company’s debt. However, the two parties are arguing about how the subsidiaries should be valued and the order in which they should be paid.
Energy Future should be loyal to their creditors that supported their business throughout the years and find a way to pay them back with the appropriate amounts. If this means taking out a loan of $2 billion in order to reduce the time spent under Chapter 11 bankruptcy, then Energy Future should make this executive decision before the end of the year when they are required to decide if they will file bankruptcy. Energy Future should act in the best interest of the stakeholders and pay each group the amount that they are in debt. The stakeholders are each affected by the decision that Energy Future ultimately makes and must be a primary concern. These stakeholders lent necessary funds to Energy Future and should be repaid even though the company is in debt.
Energy Future needs to make a decision regarding the bankruptcy filing as soon as possible. Energy Future should also create a valuation system to remove any discrepancies regarding the number of owed subsidiaries. Energy Future must be careful to try and serve the best interests of the creditors so none of the separate subsidiaries leave the company, which would end up costing Energy Future billions of dollars. Management should collectively take stakeholders’ interests into consideration when deciding if filing bankruptcy would be the best choice to repay the company’s debt to creditors. If they choose to delay bankruptcy with another loan, Energy Future should also consider the implications of their decision on other stakeholders in the company and evaluate how much each subsidiary is rightfully owed in repayment.
**Due to technical difficulties, we recently had to switch domains and transfer all of our website content. Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.