By Peg Brickley

A bankruptcy judge authorized creditors to begin voting on Energy Future Holdings Corp.'s chapter 11 exit plan Wednesday after the Texas power giant flip-flopped on a deal with senior lenders.

In a flurry of action in the final days of 2016, Energy Future walked away from a peace pact with its top-ranking lenders and cut a new deal with junior bondholders York Capital Management Global Advisors LLC, GSO Capital Partners LP, Avenue Capital Management and Angelo Gordon & Co.

The new deal is supposed to ensure Energy Future gets out of bankruptcy quickly. However, it raised hackles in the ranks of senior lenders, major investment funds that had expected to collect nearly$800 million in premiums in addition to payment in full on their loans under a litigation settlement. Instead, they will get what they are owed on the loans but have to continue a court fight if they want to collect the premiums.

Wednesday, Judge Christopher Sontchi found that Energy Future had given voting creditors enough information to make up their minds on whether to support its often-revised chapter 11 plan. Energy Future's bankruptcy strategy began years ago as a debt-for-equity swap arrangement and morphed into a plan to pay creditors from the sale of the company's crown jewel, a majority stake in the electricity transmissions business Oncor.

Once the votes are in, Energy Future will return to the U.S. Bankruptcy Court in Wilmington, Del., to seek confirmation of its plan. Florida power company NextEra Energy Inc., which is buying Oncor, has the right to walk away if Energy Future doesn't win confirmation by Feb. 22.

Keeping the sale of Oncor to NextEra on track was a top priority for Energy Future as 2016 drew to a close, court papers say. The company had racked up a long winning streak in litigation against senior lenders over so-called "make whole" provisions, which require the borrower to make lenders whole if it pay off its loans early.

But an appeals court in Philadelphia in November overturned earlier decisions, saying Energy Future had to honor the make-whole provisions, paying lenders premiums to compensate them for the profits they lost when the company refinanced its debt.

That appellate-court ruling shifted about $800 million in value away from junior creditors and into the pockets of senior lenders, shaking up the power dynamics in Energy Future's bankruptcy case at a crucial juncture. After first announcing it would settle with senior lenders and take its chances in a chapter 11 plan confirmation fight against junior creditors, Energy Future switched sides and made peace.

York, GSO, Avenue and Angelo Gordon promised to deliver the votes to push Energy Future's chapter 11 plan through to confirmation, and Energy Future promised to continue litigation against senior lenders in hopes of winning a reversal on the $800 million loss.

Philip Anker, lawyer for some of the senior lenders, said the decision sends Energy Future down the path of prolonged litigation and dwindling value pursued for years by Nortel Networks Corp., a Canadian telecommunications powerhouse that collapsed in 2009. Nortel racked up $7.3 billion by selling its businesses, then spent several years and hundreds of millions of dollars in court fights over how to divide the money.

Energy Future promised as part of its revised chapter 11 exit plan to set aside cash from the Oncor sale to pay off the senior lenders if they ultimately win the make-whole litigation. Mr. Anker said Energy Future's chapter 11 plan will be challenged at confirmation on the grounds the money being held aside isn't enough. As in Nortel's case, continued make-whole litigation could take years and the cost of the court fight will drain the cash reserve, he said.

Senior lenders, if they win, want "no 'ifs', no 'ands', no 'buts,' payment in full," Mr. Anker said.

Energy Future filed for bankruptcy protection in April 2014, loaded down with $42 billion in debt. Most of Energy Future's operations, including the power generating and retailing businesses, reorganized and exited chapter 11 last year as a new company, Vistra Energy.

Write to Peg Brickley at peg.brickley@wsj.com

(END) Dow Jones Newswires

January 04, 2017 14:01 ET (19:01 GMT)

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