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Bankruptcy proceeding stalls as Energy Future's creditors protest

The fate of Dallas, Texas-based Energy Future Holdings, which filed for bankruptcy in April this year, has become uncertain once again. With two loans already approved by a bankruptcy court, the company was on the verge of finalizing a plan to restructure its debt and thus get closer to emerging out of bankruptcy. The approval of a third loan would have made this process a certainty. But opposition from some creditors, who felt the plan gave higher preference to other lenders, has forced the company to think of alternatives.

At a recent hearing, the company's attorney informed the judge of Energy Future's decision to withdraw or amend the existing plan on the grounds that the debt owed by the company had increased in price, and with its assets attracting new buyers. The company now faces an August 8 deadline to modify the plan, which, if not met, will force the company to draw up a fresh arrangement. Also adding pressure is the fact that the lawyer representing some of the creditors not included in the plan has threatened legal action if the existing plan is approved without modifications.

Typically, a court arbitrating a bankruptcy has to ensure that any reorganization plan equally favors all lenders. However, judges have the discretion to let the company decide which creditors to repay first, and do not oppose favoring lenders who have played a significant role in backing the company during difficult times. In this case, for instance, lenders like Fidelity Investments, Pimco and Western Asset Management have been picked to be paid ahead of others, which the bankruptcy judge has no intention to challenge.

Following a meeting with groups of opposing lenders, the judge however felt that the company's plans for these creditors were unsatisfactory, forcing Energy Future to hold discussions with them. The objections have increased with the two loans being approved, and lawyers for the dissenters are hoping that the reconsidered deal will account for negotiations with all creditors, instead of being forced down by larger lenders.

Source: Bloomberg Businessweek, "Energy Future Bankruptcy Plan in Jeopardy as Lenders Balk", Linda Sandler and Steven Church, July 18, 2014

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