On April 29, 2014, Energy Future Holdings filed what it claims is a pre-packaged chapter 11 bankruptcy in Delaware. The bankruptcy, which ranks among the largest cases ever with over $36 billion in assets and nearly $50 billion in debt, is the product of an agreement with senior bondholders on the terms of a debt-for-equity swap.

Second lienholders, who claim to have been frozen out of the discussions, oppose the deal and were prepared with lengthy papers filed almost immediately seeking to transfer the bankruptcy case to Texas, and requesting extensive discovery from the debtors, lenders, and management. In their papers, the second lienholders contend that the proposed deal is designed to benefit senior bondholders at the expense of junior creditors, highlight alleged pervasive conflicts of interest in the debtor’s corporate governance structure and complain of collusion between the Debtor’s management and the senior bondholders to intentionally depress value of the company at the expense of junior creditors.

Junior Creditors Aim to Take Control

It appears that the second lienholders may not only be challenging the company’s valuation, but may also be seeking to extract value through a litigation strategy focused not only on management and the senior lenders, but also on Goldman Sachs, TPG Capital, and KKR & Co., the sponsors of the 2007 leverage buyout of TXU Corporation by Texas Competitive Electric Holdings, a debtor affiliated with Energy Future Holdings. In the meantime, EFH’s value may itself be a moving target, and junior creditors would benefit if natural gas prices increase during any delay.

As observed by a commentator in Dallas, Energy Future Holdings drew the same judge in Delaware that presided over the Six Flags Entertainment Corp. bankruptcy. Although different in many respects, the Six Flags case was likewise touted as a pre-packaged bankruptcy that was ultimately taken over by junior bondholders. Once they wrested control, they were able to raise new money, install new leadership, and gain $2.8 billion in market capitalization in the 4 years since emerging from bankruptcy.

Only time will tell which viewpoint will prevail, but it is already clear that there is plenty of litigation ahead.