(The following statement was released by the rating agency)
Dec 5 - Fitch Ratings has deemed the recently concluded exchange offer to
exchange a portion of the LBO notes and legacy notes at Energy Future Holdings
Corp (EFH) for new 11.25%/12.25% senior toggle notes due 2018 at Energy Future
Intermediate Holding Company LLC (EFIH) as a distressed debt exchange (DDE). As
a result, Fitch has lowered the Issuer Default Rating (IDR) of EFH to
'Restricted Default' (RD) from 'CC'. Fitch has also lowered the IDRs of EFIH,
Energy Future Competitive Holdings Company (EFCH) and Texas Competitive Electric
Holdings Company LLC (TCEH) to 'RD' from 'CC'. The rating for EFH's LBO notes, a
portion of which are subject to DDE, has been downgraded to 'CC/RR3' from
'CCC-/RR3'. The rating for EFH's legacy notes, which are also subject to DDE, is
unchanged at 'C/RR6'.
On Dec. 5, 2012, EFIH announced that it will be issuing $1.145 billion of new
11.25%/12.25% senior toggle notes due 2018 in exchange for $1.6 billion of EFH's
debt as follows:
--$234 million of 5.55% series P senior notes due 2014;
--$510 million of 6.50% series Q senior notes due 2024;
--$453 million of 6.55% series R senior notes due 2034;
--$94 million of 10.875% senior notes due 2017;
--$313 million of 11.25%/12.00% senior toggle notes due 2017.
Fitch has deemed the debt exchange as DDE given the material reduction (an
average of 71%) in the principal amount for the exchanges notes and change from
a cash pay basis to pay-in-kind (PIK). The new notes carry a three-year PIK
feature.. The material reduction in terms for the exchanged notes is only
partially offset by increase in interest rates on the new notes and a higher
seniority in the capital structure for the legacy notes.
Since the exchange offer has been completed under a privately negotiated
transaction with investors, Fitch has simultaneously taken various rating
actions based on the post-exchange capital structure and the fundamental outlook
for each of the entities. Fitch has upgraded the IDRs of EFH and EFIH to 'CCC'
from 'RD'. Fitch has also upgraded the IDRs of TCEH and EFCH to 'C' from 'RD'.
Fitch has upgraded the ratings of EFH's LBO notes to 'CCC+/RR3' and EFH's legacy
notes to 'CC/RR6'. Fitch has also assigned a 'CCC+/RR3' rating to the new notes
issued by EFIH pursuant to the exchange offer, which rank pari passu to EFH's
LBO notes. The ratings for Oncor Electric Delivery Company LLC (Oncor) are
unaffected by today's rating actions.
Fitch has delinked the ratings of TCEH and EFH/EFIH based on the expectation
that EFH will either make EFCH an unrestricted subsidiary or remove the
cross-default language from the LBO notes' indenture in the near future,
thereby, insulating EFH/EFIH's credit profile from any potential restructuring
at TCEH. The repayment of the inter-company loans (ICL) to TCEH year-to-date,
including the commitment to repay $680 million of remaining ICLs in January
2013, reduces the financial ties between the two entities significantly. Fitch
considers it highly unlikely that EFH will provide any significant financial
support to TCEH going forward. The just concluded exchange offer is further
viewed by Fitch as a step to affect liability management at EFH/EFIH as a
stand-alone entity. As a result, Fitch believes that the degree of linkage
between EFH and TCEH is significantly weaker than before and the IDRs are,
therefore, being based on the respective stand-alone credit profiles of the two
The 'CCC' IDRs for EFH and EFIH reflect the highly leveraged capital structure,
sufficient but declining liquidity, and currently constrained, but growing
distributions and tax payments from Oncor. Fitch expects dividend distributions
and corporate tax payments as the only principal source of cash flows for
EFH/EFIH going forward. Fitch expects EFH/EFIH's FFO to consolidated debt to be
in a 6%-7% range and FFO to interest ratio to be 1.7x-1.8x over 2013-2018, which
is indicative of a 'CCC' IDR. Fitch's financial forecasts assume no tax
implications for EFH due to any potential restructuring activities at TCEH.
The just concluded exchange offer is marginally positive for EFH/EFIH's credit
profile given the $450 million debt reduction and $360 million interest expense
savings over three years (due to the PIK feature) that benefits near-term
liquidity. Combined liquidity at EFH/EFIH has been bolstered by $2.25 billion of
first and second lien debt issuances year-to-date, of which a significant
portion has been utilized or committed to repay the ICLs to TCEH that stood at
$1.6 billion at the end of 2011. The repayment of the demand note does not alter
the overall leverage at EFIH, since the inter-company notes were guaranteed by
EFIH on a senior unsecured basis, but the interest cost to EFIH did increase
materially as a result of the issuances.
Combined liquidity at EFH/EFIH stood at $1.48 billion as of Sept. 30, 2012,
which does not reflect the $253 million first lien issuance in October and
includes the $680 million held in escrow to repay the remaining ICLs to TCEH.
Looking forward, Fitch expects combined liquidity to be affected by reduced
upstream dividend and cash tax payments from Oncor during 2012-2013 and higher
interest expense associated with the new debt issued by EFIH year-to-date,
partially offset by interest cost savings from the recently concluded exchange
offer. Fitch expects liquidity to be adequate until 2016 given EFIH has capacity
to issue an incremental $250 million in second lien debt based on current debt
incurrence restrictions. Further liability management, refinancing of the
current high cost debt, and/ or equity infusion will be needed to right size the
capital structure and support liquidity at EFH/EFIH, in Fitch's view.
The 'C' IDR for TCEH reflects Fitch's view that the current highly leveraged
capital structure is not sustainable. Despite the upward movement in the
shorter-term natural gas prices and declining reserve margins in Texas, Fitch
believes it highly unlikely that power prices will recover to levels required
for TCEH to reach cash breakeven. TCEH's generation output continues to suffer
from partial economic back-down as natural gas power plants displace coal units
during certain off-peak periods. While TXU Energy has been able to somewhat stem
customer defections and sustain attractive margins year-to-date due to falling
wholesale prices, intensified competition and significant headroom between TXU
Energy's and competitive offers are likely to put pressure on both margins and
Liquidity at TCEH stood at $2.3 billion as of Sept. 30, 2012, which consists of
$309 million of cash and cash equivalents, $1.77 billion availability under its
revolving facility and $265 million availability under its letter of credit
facility. The cash balances as of Sept. 30, 2012 do not include the $680 million
held in escrow to settle demand notes payable by EFH but include $750 million in
cash collateral received from counterparties for commodity hedging and trading
transactions. Fitch forecasts the free cash flow deficit in 2013 to
significantly deplete TCEH's current available liquidity and with the expiration
of $645 million unextended portion of the revolving credit facility in October
2013, liquidity runs out in late 2013/early 2014 timeframe.
TCEH's near-term debt maturities are significant including the $3,851 million
unextended portion of term loans and deposit letter of credit (LOC) loans in
October 2014 and the $4,875 million of cash pay/PIK toggle notes in 2015/2016
(which excludes approximately $363 million of notes held by EFH and EFIH). The
debt maturity schedule could be exacerbated by the springing maturity provision
for the extended portions of the term loans and deposit LOC loans if the
requisite conditions are not met. Fitch
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