EME Homer City unit may restructure bonds through bankruptcy filing

By Angela McDaniels

Tacoma, Wash., May 3 - EME Homer City Generation LP said General Electric Capital Corp. and some holders of Homer City Funding LLC's bonds have reached an agreement in principle that includes exchanging the bonds for new notes through a pre-packaged Chapter 11 plan of reorganization.

The bonds involved are Homer City Funding's 8.137% senior secured bonds due 2019 and 8.734% senior secured bonds due 2026.

As previously reported, EME Homer City may be facing a default. The Homer City, Pa.-based company owns three coal-fired electric generating units, which it collectively refers to as the Homer City plant. It completed a sale-leaseback of the plant to third parties in December 2001.

EME Homer City needs to make some environmental improvements to the plant by early 2014 in order to remain in compliance with Federal environment regulations. It estimates the improvements will cost $700 million to $750 million.

In the second half of 2011, EME Homer City and its indirect parent, Edison Mission Energy, conducted a bidding process to obtain capital funding to help finance the improvements. The company failed to attract the capital needed and does not expect to generate enough funds from operations to complete the retrofits.

The company said the sale-leaseback agreements in some cases significantly limit or prohibit its ability to incur debt or make capital expenditures. As a result, its ability to make the environmental improvements will be dependent on funding from the owner-lessors or third parties.

A failure to resolve the source of funding could result in EME Homer City's default under the lease agreement, which would give rise to remedies for the owner-lessors and secured lease obligation bondholders. These could include foreclosing on the leased assets, the general partner of Homer City or both.

Term sheet

GE Capital, one of the owner participants, and some of the bondholders had discussions about modifications to the bonds, and they have reached an agreement in principle on a non-binding restructuring term sheet, according to an 8-K filing with the Securities and Exchange Commission.

Among other things, the term sheet provides for the exchange of the bonds for new notes and the cancellation of the related lessor notes through the pre-packaged plan of reorganization.

The reorganized entity under the plan would be merged with the owner lessors of the Homer City plant, and it would be a majority-controlled indirect subsidiary of GE Capital.

Among other things, the term sheet proposes the following:

• At Homer City Funding's option, interest payments through April 1, 2014 would be made in kind at 50 basis points above the existing cash interest rate;

• Amortization payments would be suspended during the PIK period;

• The new notes would be voluntarily callable at 115% of par from Aug. 2 through Aug. 1, 2013, 107.5% of par from Aug. 2, 2013 through Aug. 1, 2014, 103.5% of par from Aug. 2, 2014 through Aug. 1, 2015 and 100% of par thereafter;

• The reorganized entity would be permitted to get an up to $75 million working capital loan from GE Capital secured by a first-priority lien on the reorganized entity's inventory and receivables.

GE Capital and the bondholders plan to negotiate definitive documentation on the term sheet. They also discussed the terms of a plan support agreement but have not reached agreement on all of the terms.

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