Edison Mission Files for Bankruptcy

Earlier today, Edison Mission filed for bankruptcy in the Northern District of Illinois. This was long expected by the distressed debt and restructuring community. In fact, in the first day affidavit (embedded below), states:

 "Given EME’s financial outlook, earlier this year, EME’s board, management, and professional advisors began exploring various restructuring alternatives with EME’s two major stakeholders: EIX, as EME’s sole shareholder; and a group of holders of the Senior Notes. After approximately six months of vigorous, arm’s-length negotiations, EME, EIX, and the holders of a majority of the Senior Notes by outstanding principal amount (collectively, the “Consenting Noteholders”), reached an agreement that provides the foundation for a comprehensive settlement transaction between the parties that is designed to maximize the value of the Debtors’ estates and ultimately result in a substantial deleveraging of EME’s balance sheet (the “Settlement Transaction”)

Edison Mission bonds closed the day up a few points, but up about 4 points points from before news sources reported an imminent bankruptcy filing. The bonds are currently quoted two ways:
  • TSA - Transaction Support Agreement bonds or bonds that have signed off on the TSA
  • Non-TSA bonds - Bonds attached to parties that have not signed the transaction support agreement
 From the sidelines it looks like the two bonds are pricing on top of one another (depending on the flavor), but the TSA bonds are bid without. This is a result of the TSA agreement which states a "Consenting Noteholder" agrees only to sell his/her bonds to another "Consenting Noteholder" or if the buyer is not a party to the TSA, that buyer must sign the TSA. These stipulations though do not forbid parties to the TSA from going out and buying other bonds.

Here is the Exhibit 3 of the First Day Affidavit (Transaction Support Agreement (including the Equity Term Sheet and the Restructuring Term Sheet exhibits thereto):


You can see signature pages in the back listing parties involved in the case. They include:

  • AllianceBernstein
  • Arrowgrass
  • Avenue
  • Barclays Capital
  • BlueMountain Capital
  • Canyon Capital
  • Cincinnati High Yield Group of JPM Investment Management
  • Citi Capital Advisors (Distressed Debt Strategies Group)
  • Claren Road
  • Credit Value Partners
  • Distressed Debt Trading Desk of Citigroup
  • Jefferies High Yield Trading
  • Litespeed
  • Nomura
  • Och-Ziff
  • River Birch
  • SVP
  • TCW
  • York Capital - (It is rumored that York is one of the bondholders running the show here)
In another filing exhibit (Docket 36), there is also a list of noteholders committee members as disclosed by the Debtors to its financial advisers for potential parties of interest. This is dated 9/14/2012. There are some missing funds from the above list relative to this one:

I'm not sure if these means these parties have sold out of the bonds or simply did not sign the TSA.

The plan currently contemplated would be bondholders taking over the equity in Edison Mission from EIX with the current tax sharing agreement to remain in place. The tax sharing agreement is incredibly salient in this case given the way money has flown to and from Edision Mission over the past few years which was dramatically altered due to tax code changes regarding accelerated depreciation.

Along with that, Edison Mission's cash flow potential is driven by nat gas prices. As an IPP with ~50% of its generation coming from coal, if nat gas is strong in the outer years, EME cash flows increase dramatically. You can see some projections Houlihan put together in an 8K below:

Interestingly, the wind assets that EME control did not file for bankruptcy. The wind assets are tremendously valuable. Some other assets (California gas fired plants) in the structure are also tremendously valuable. Depending on how you value those two pieces of the puzzle + tax allocation payments + cash, the market is ascribing very little value (or not value at all) to the Midwest Gen assets.

The first day hearing is tomorrow, 12/18 at 1:30PM in Chicago. We will update readers as the case unfolds.



hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.