Buffett’s Oncor bid awakens ghosts of Charter, Tribune as Elliott cram-down fight looms

19 July 2017
Warren Buffett’s competition against Paul Singer for control of Oncor makes for a popular storyline: billionaire vs billionaire in a literal power play. But to reach a bankruptcy court resolution, Buffett’s more straightforward bid may need to pull from entangled prior rulings to overcome Singer’s robust blocking position, according to two sources familiar with the matter and multiple legal sources watching the standoff.
 
Debtor EFIH – owner of the 80% stake in sought-after regulated utility Oncor -- has already filed a restructuring plan around Berkshire’s USD 9bn cash bid. Moreover, both Berskshire and EFIH management maintain they’ve made strides toward getting the PUCT to approve the ownership change.
 
However, Singer’s Elliott Management owns more than 74%, or roughly USD 1.2bn, of the USD 1.65bn EFIH PIK unsecured notes, making for a dominant blocking position when it comes to voting on the plan for court approval. With that kind of sway, the fund has been pressing to slow things down on the Chapter 11 side so it can advance its own standalone POR based on a higher valuation and a rights offering. Elliott publicly asked Oncor last week to defer filing an application with the regulators until its board has “had a full and fair opportunity to consider Elliott’s proposed transaction.”
 
To that point, Elliott personnel along with lawyers from Ropes & Gray flew down to Texas on Monday to hold talks with both the debtor and the PUCT, said the two sources familiar. At the same time, the valuation fight Elliott needs to wage in justifying a vote against the Berkshire-centered plan in court is well underway. In a letter filed last week, the fund took issue with the debtor and Berkshire’s goal of filing the PUCT application for approval of the merger on or around 17 July. That kind of timeline would “undercut Elliott’s proposed equitization plan,” which is based on a valuation that is roughly USD 400m higher than Berkshire’s USD 18.1bn valuation. The Berkshire plan only cuts the EFIH PIKs a roughly 18% recovery.
 
Elliott also maintains that a PUCT application would have a chilling effect on its efforts to raise financing for its POR. The fund hired Moelis to work on the financing and has already been in talks with different parties and investors, including DIP lender PIMCO to raise the funds.
 
“If Elliott manages to get the financing and their proposal doesn’t have any major holes in it and is supported by many impaired creditor classes because it offers a higher valuation, it’s hard to see how the judge won’t take it into account,” said one of the sources familiar.
However, Judge Christopher Sontchi overseeing the case in Delaware also needs to have some certainty that the Elliott-plan meets PUCT requirements and won’t be rejected by the regulators like the last two plans that he confirmed – one involving a sale of Oncor to a Hunt-led group of unsecured creditors at merchant subsidiary TCEH, and another plan that called for a merger with regulated utility company NextEra. “When you have someone (Berkshire) coming in with USD 9bn of cash at this stage in the game, you need to move quickly,” said the second source familiar. “It’s understandable that the company and the lawyers want to seal this deal. You have the bird in the hand and can’t give it away.”
 
Cutting class
Given that the Delaware court, the debtor, and regulators are fatigued and anxious to put a bow on the three-years-running EFIH bankruptcy, Elliott’s best weapon against the Berkshire-plan momentum is to gin up creditor opposition, the sources noted. For their part, the onus is on Berkshire and the debtor to isolate Elliott when it comes to creditor voting.
 
Generally, a POR needs the approval of one impaired class (an “approving impaired class”) in order for the court to cram down another class. On that front, it’s notable that the Berkshire POR lists the EFIH unsecured PIKs (Class B6), EFH LBO notes (Class B5) and various unsecured claims at the debtor parent EFH (Classes A4 through A11) as the impaired voting classes.
 
 
 
 
In theory, an approving vote by any one of the impaired EFH unsecureds could be enough to justify confirmation despite being opposed by Elliott’s impaired class at EFIH. This would agree with the prior persuasive ruling in the 2009 Charter Communications bankruptcy tried in the Bankruptcy Court for the Southern District of New York, the sources said. In that case, debtors threatened to cram down an opposing class of one debtor with the supporting votes of an approving impaired class at another debtor subsidiary. Judge James Peck was in favor, ruling that a plan could be confirmed with the votes of an impaired accepting class sitting at one subsidiary even if all impaired classes at a different silo vote against the plan.
 
A similar ruling was made in Enron out of the Bankruptcy Court for the Southern District of New York.
 
However, both of those plans relied on the extraordinary remedy of substantive consolidation. In EFIH/EFH, subcon has not been proposed, and throughout the bankruptcy the court has maintained a clear ability to delineate the debtors, the sources noted.
 
This dynamic could make the 2011 Tribune bankruptcy a more applicable reference point. In that case, Judge Kevin Carey of the Delaware Bankruptcy Court found that, in the absence of subcon, the bankruptcy code must be applied on a per debtor basis as opposed to a per plan basis. Since no precedent has been set on these matters, Judge Sontchi could break new ground. The Tribune and Chater findings are broken down in a 2012 article by Michael Sage, partner and co-chair of business restructuring and reorganization at Dechert.
 
A potential neutralizer of all the legal gymnastics that could play out with regards to vote counting is the outsized role lined up for Fidelity. The fund is the largest single holder of EFH unsecured claims and also a major owner of the USD 60m EFH unsecured LBO notes. This relatively tiny bond group is of heightened importance since it’s the only security listed as a class at both the EFIH debtor (Class B5) and the EFH debtor (Class A6). The notes, which were issued by EFH and have a cross guarantee from EFIH, are slated to make just a 17% recovery under the Berkshire plan.
 
While such a slim recovery may set up Fidelity to oppose the plan, the firm may have other incentives. It also owns around two-thirds of the USD 2.5bn second lien notes at EFIH. That second lien class is unimpaired and slated to make a full cash recovery.