ISDA DC delays Texas Competitive ruling

ISDA voted to delay its decision on ruling whether a bankruptcy credit event has occurred with respect to Texas Competitive Electric Holdings Company LLC until September 1, 2011.

It was asked to rule on the event by Aurelius Capital Management in a detailed August 26, 2011 submission to the CDS ruling body. This is not the first time Aurelius has brought to light news on the former TXU. It originally claimed TXU’s successor companies, Energy Future Holdings Corp. and Texas Competitive Electric Holdings Co. had technically defaulted on some of their buyout debt earlier this year after received inter-company loans to continue normal business operations at bel0w-market interest rates.

At issue is the billion-plus in credit default swap contracts referencing Texas Competitive Electric’s debt which would have to payout in the case a credit event is declared valid.

While the company has not officially filed for bankruptcy or missed any interest payments, Aurelius now points to some recent regulatory fillings as summarized by Dow Newswires:

The case surrounding Texas Competitive Electric, now part of Energy Future Holdings Corp., was put to the committee Friday as a possible “bankruptcy credit event” after hedge fund Aurelius Capital Management LLC argued that the Texas utility admitted in regulatory filings that it was effectively insolvent. While the company has not filed for bankruptcy protection or failed to pay its debts, Aurelius says its blatant admission of insolvency should be enough for the fund and other holders of protection to be compensated by banks that sold default swaps.

The utility’s Aug. 15 filing states: “valuation analyses of [Texas Competitive Electric's] business indicate that the principal amount of its outstanding debt exceeds its enterprise value” and that it “may have difficulty successfully implementing any refinancing of [its] debt or obtaining additional financing due to the valuation of [its] assets.”

The ISDA committee voted mostly in favor of delaying its first meeting on the Texas Competitive Electric case until Sept. 1. Some 12 members of the committee voted for the delay, but three members voted to address the matter sooner, namely D.E. Shaw, Goldman Sachs and Pacific Investment Management Co.

It could not be immediately determined if those firms that voted ‘no’ to a delay also hold protection contracts on Texas Competitive Electric.

The net amount of credit-default swaps outstanding on Texas Competitive Electric as of the week ending Aug. 19–a figure that accounts for offsetting positions and shows how much money could change hands between buyers and sellers of protection if a credit event is declared–totals $1.17 billion, up from $1.15 billion the prior week, according to Depository Trust & Clearing Corp. data.

Below is a graph of Texas Competitive’s CDS price from Aurelius