NEW YORK--()--On Dec. 21, 2012, Energy Future Intermediate Holding Company LLC (EFIH) and EFIH Finance Inc. commenced an offer to exchange up to approximately $1.3 billion of new 10.000% senior secured notes due 2020 for any and all outstanding Energy Future Holdings Corp.'s (EFH):
--$115 million 9.75% senior secured notes due 2019;
--$1,061 million 10.000% senior secured notes due 2020; and
--EFIH's $141 million 9.75% senior secured notes due 2019.
The consideration will be at or close to par for the notes tendered in exchange until Jan. 8, 2013 and modestly step down thereafter; the expiration date for the offer is Jan.24, 2013.
Concurrent with the offer to exchange, EFH is soliciting consent from the holders of its existing 9.75% senior secured notes due 2019 and 10.000% senior secured notes due 2020. EFIH is soliciting consent from the holders of its 9.75% senior secured notes due 2019 to certain indenture and collateral release amendments. The proposed indenture amendments would strip the notes of many of the restrictive covenants, and modify or eliminate other provisions, including making Energy Future Competitive Holdings Company (EFCH) an unrestricted subsidiary under the existing indentures governing EFH's 2019 and 2020 senior secured notes, thereby, causing the guarantee by EFCH of such notes to be released automatically. Consent of a majority of the outstanding aggregate principal amount of each series, voting as a separate class, is required to approve the indenture amendments.
Furthermore, the proposed collateral release amendments would release the collateral securing EFH's 2019 and 2020 senior secured notes and would make EFIH an unrestricted subsidiary of EFH, thereby, causing the guarantee by EFIH of such notes to be released automatically. As a result, EFH's 2019 and 2020 notes would become junior to all the secured and unsecured debt and other liabilities of EFIH. The proposed collateral release amendments would also release the collateral securing EFIH's 9.75% senior secured notes in its entirety. Consent of at least 66 2/3% of the outstanding aggregate principal amount of each series of notes, voting as a separate class, is required to approve the proposed collateral release amendments.
Fitch has deemed the first lien exchange offer described above to be a distressed debt exchange (DDE) since the exchange offer is accepted only if the tendering bondholders also consent to indenture amendments that materially impair the position of holders that do not tender.
As a result, Fitch has placed EFH and EFIH's 'CCC' IDRs on Ratings Watch Negative along with EFH's 9.75% and 10.000% senior secured notes due in 2019 and 2020, respectively, and EFIH's 10.000% senior secured notes due 2020. Fitch currently rates both the EFH and EFIH senior secured notes 'B/RR1'.
On confirmation of the completion of the exchange, Fitch will lower the Issuer Default Rating (IDRs) of EFH and EFIH to 'Restricted Default' (RD) and subsequently assign an appropriate IDR for the post-exchange capital structure and fundamental outlook. Fitch has also affirmed Texas Competitive Electric Holding Company LLC's (TCEH) 'C' IDR.
EFIH also announced that pursuant to a privately negotiated exchange, it has issued $159.03 million of its 11.25%/12.5% senior toggle notes due 2018 in exchange for EFH's $38.5 million 10.875% senior notes due 2017 and EFH's $118.9 million 11.25%/12.00% senior toggle notes due 2017. The EFIH 2018 notes being issued in this exchange are part of the same series of notes that were issued on Dec. 5, 2012 in exchange for a portion of EFH's LBO notes and legacy notes, an exchange Fitch had also deemed as DDE. EFIH also commenced another exchange offer to exchange up to approximately $124 million of new EFIH 2018 notes for the remaining EFH's cash pay/toggle notes due 2017.
If there is 100% participation in the above mentioned first lien exchange offer and unsecured notes exchange offer, EFH's debt will consist of only legacy or pre-LBO notes of $613 million. In such a scenario, upon the conclusion of the exchange offers, Fitch envisages no change in the recovery analysis for the combined EFH/EFIH entities.
As of Dec. 9, 2012, EFIH held approximately $1.7 billion of EFH's cash pay notes due 2017 and approximately $3.4 billion of EFH's senior toggle notes due 2017. EFIH plans to distribute substantially all of these notes in addition to the notes it will acquire in the unsecured notes exchange offer mentioned above to EFH prior to or in the first quarter of 2013. EFH plans to cancel these notes. EFIH will continue to hold approximately $1,251 million of EFH's legacy notes, a significant amount of which it acquired in the Dec 5th exchange, and $79 million of TCEH's 10.25% senior notes due 2015. The interest payments that EFIH will receive on these holdings along with dividend received from Oncor will be used to service its own debt obligations. EFH is expected to make up to $75 million of capital contributions to EFIH.
Fitch continues to view the capital structure of EFH/ EFIH as highly leveraged. Liquidity is adequate till 2016, in Fitch's view given EFH and EFIH will have capacity to issue $250 million of second lien debt based on current debt incurrence restrictions. EFIH will have capacity to issue $400 million of additional senior unsecured debt, which could be incurred for exchanges of EFH's unsecured debt.
Separately, on Dec. 21, 2012, TCEH commenced a three-year extension request of its $645 million revolver maturing October 2013. As consideration for the extension, TCEH will pay $0.5264 of first lien term loans due 2017 for each $1.00 of 2013 revolver extended to 2016. The extension request is open for at least five business days. TCEH concurrently announced that it has secured commitments from a lender holding $425 million of the 2013 revolver for the three-year extension. If all the lenders agree to extend the 2013 revolver, TCEH will end up issuing approximately $340 million of additional first lien term loans.
This will leave $1.2 billion of incremental secured debt capacity still available with TCEH, of which $410 million can be first lien and the balance can be second lien debt. TCEH has an unlimited capacity to issue first lien debt to refinance first lien debt issued under its senior secured credit facilities.
The focus for TCEH now turns to 2014, which becomes the next critical year from the perspective of both liquidity and debt maturities. As of Dec. 19, 2012, TCEH had approximately $1.3 billion of cash and cash equivalents and approximately $114 million of available capacity under its senior secured letter of credit (LOC) facility. This does not include $680 million held in escrow to settle demand notes payable by EFH. As of Dec. 19, 2012, TCEH had fully drawn on its revolving credit facility; total revolver borrowings totaled approximately $2.1 billion.
Fitch expects free cash flow deficits to deplete TCEH's existing liquidity such that liquidity runs out in 2014. TCEH's near-term debt maturities are significant including the $3,851 million unextended portion of first lien term loans and deposit LOC loans in October 2014 and the $4,875 million of cash pay/PIK toggle notes in 2015/16 (which excludes approximately $363 million of notes held by EFH and EFIH). The maturity schedule could be exacerbated by the springing maturity provision for the extended portion of the term loans and deposit LOC loans if the requisite conditions are not met. Fitch considers a material restructuring of TCEH's capital structure highly likely over the next 12 months.
WHAT COULD TRIGGER A RATING ACTION
Commodity Price Changes: Fitch considers it highly unlikely that TCEH's IDR will be upgraded unless the commodity environment significantly improves in its favor in a very short period of time. TCEH's debt instrument ratings, however, could be upgraded or downgraded depending upon Fitch's long-term view of power prices in ERCOT, which forms a key driver for TCEH's recovery analysis.
Increased Retail Competition: Rising competitive intensity in the retail markets in Texas could lower the value that Fitch ascribes to TXU Energy, thereby, lowering the recovery values for TCEH's senior secured first lien debt.
Change in Leverage at EFH/EFIH: A reduction in debt at EFH/EFIH will be positive for their credit profile. Any reduction in leverage through liability management activities will be evaluated by Fitch based on the terms of the transaction and could lead to changes in the recovery analysis.
Lower Than Expected Cash Flows: A material shortfall in cash flows at EFH/EFIH versus Fitch's current expectations due to factors such as reduced dividends and/or corporate tax payments from Oncor Electric Delivery Company LLC (Oncor), federal tax obligations triggered by a potential restructuring at TCEH among other factors could lead to a downgrade in the ratings of these entities.
Change in Oncor's Valuation: Any change in Fitch's assessment of the valuation of Oncor due to reasons such as change in regulatory environment, any restriction placed on upstream dividend distribution, a change in electric sales outlook etc. could lead to a change in recovery ratings for EFH/EFIH's debt instruments.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research
--'Corporate Rating Methodology' (Aug. 8, 012);
--'Distressed Debt Exchange' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (May 4, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Distressed Debt Exchange
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers