Talen Restructuring, Powering Through Bankruptcy

Welcome to the 122nd edition of the Pari Passu newsletter.  

Last week, we covered one of the biggest energy restructuring cases of 2023 - Enviva.

Today, we are going to go further back to one of the most fascinating cases of the last 5 years - Talen Energy! The company’s journey from a publicly traded power producer to a privately held entity, and eventually into Chapter 11 bankruptcy, serves as a case study of how energy markets, hedging strategies, and capital structure mismanagement can drive a company into financial turmoil.

Talen’s restructuring story is particularly compelling—not just because of the scale of its operations, but due to the mechanisms employed in its turnaround. The company’s challenges stemmed largely from an under-hedged position in the face of rising natural gas prices, coupled with a capital structure that left it exposed to severe liquidity pressures. However, Talen’s restructuring (and specifically post-restructuring performance) has defied expectations as the equity has generated over 400% in returns since its emergence from bankruptcy in June 2023. This deep dive explores the factors that led to Talen’s financial distress, the key legal and financial maneuvers used during its restructuring, and the broader implications of its remarkable turnaround.

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Talen Energy Overview

Talen Energy Corporation (TEC) was established in 2015 following the spinoff of what was formerly known as PPL Energy Supply. PPL is a power generation business that generates, transmits, distributes, and sells electricity supply. The company produces electricity through coal, natural gas, oil, hydro, and solar sources. In 2015, PPL spun-off its generation assets (these are various plants located across the United States that generate power and electricity) to merge with other generation assets of Riverstone Holdings, a private equity company. Immediately following the spinoff transaction, TEC remained a public entity but was subsequently taken private by Riverstone holdings when the PE firm acquired the remaining shares that they did not already hold (obtaining a 100% stake in the company). This private deal was valued at approximately $5.2bn. In years since the take-private deal, the company struggled operationally and financially for numerous reasons (we will touch on this below), which led the company to file for Chapter 11 bankruptcy in May 2022 [2].

Before we dive into the causes of TEC’s bankruptcy filing, however, it is important to understand how the company fundamentally operated and generated revenue. Per the company’s first-day declaration, Talen’s primary sources of revenue are energy revenue and capacity revenue. Energy revenue, as the name suggests, is income earned based on the actual electricity produced and sold in the energy markets. Capacity revenue, on the other hand, is a bit less clear. We will dive more deeply into it below, but briefly, capacity revenue is income generated from a payment in advance of an energy producer providing energy. Essentially, a buyer will pay an electricity provider in advance for their ability to provide electricity (or capacity) if / when needed.

Talen’s energy revenue represents the revenue from the wholesale sales of energy produced by the company’s plants, as well as the sale of its produced electricity to commercial and retail customers. As of their filing date, Talen Energy generated energy revenue from 3 primary sources: Nuclear, Natural Gas / Oil, and Coal [2],[3]. 

1. Nuclear: The company operates the Susquehanna Nuclear Plant, which relies on a structured fuel cycle involving uranium mining, enrichment, and fabrication into fuel assemblies. Talen secures nuclear fuel through a portfolio of long-term contracts with staggered expiration dates, ensuring a steady supply. Spent fuel is managed through an on-site dry cask storage facility, which is being expanded to accommodate operations through 2044. Additionally, Talen receives financial compensation from the U.S. government under a settlement agreement related to spent nuclear fuel storage costs [3].

2. Natural Gas & Oil: Talen sources natural gas through a combination of long-term contracts, short-term agreements, and spot market purchases, allowing flexibility in response to market conditions. The revenue comes from selling power through converting gas to power. Most of its natural gas needs are met via short-term transactions, optimizing costs based on fuel availability and pipeline access. Oil requirements are typically fulfilled from on-site inventory, and replenished through spot market purchases as needed [3].

3. Coal: The company secures coal from mines in central and northern Appalachia, Colorado, and Montana, with deliveries via rail, barge, or conveyor.. Additionally, many of its coal-fired plants are equipped with flue gas desulfurization (scrubber) systems, requiring limestone, which is sourced through contracts extending to 2030 for certain facilities [3].

Talen produces this energy through its generation portfolio, which consists of 18 facilities that collectively produce near 13,000 megawatts of power (roughly the energy consumed by New York City). The fleet breakdown can be seen in Figure 1 below. Talen Energy operates in multiple deregulated electricity markets, with two of the most significant being PJM Interconnection (PJM) and the Electric Reliability Council of Texas (ERCOT). These markets function as wholesale electricity exchanges, where power generators sell electricity and utilities or large consumers purchase it for distribution. The “Other” markets seen in the figure below refer to Western Electricity Coordinating Council (WECC) and ISO New England (ISO-NE) [3].

Additionally, the geographic locations and markets of the energy plants can be seen below in Figure 2.

One highlight we wanted to note from Talen’s generation fleet is the importance of the Susquehanna Nuclear Facility. As aforementioned, TEC's total fleet can generate 13,000 megawatts. In 2021, the company reported it generated 35.7mm of megawatt-hours of electricity. Of that amount, susquehanna contributed to over 20mm MWH, despite contributing to a relatively small amount of MW capacity relative to the entire portfolio. During this period, Susquehanna was running near its capacity, telling us that the Nuclear energy is more significant to TEC’s revenue and cash flow generating abilities relative to other energy sources (Natural Gas and Coal) [6].

The second revenue source for TEC stems from its capacity revenues. As we discussed above, TEC operates its plants in multiple regions, each with its own capacity auction market. In PJM’s capacity market, for example, companies like Talen can ‘bid’ their power plants into the auction by committing to keep them available to generate electricity if needed during future periods of peak demand. Importantly, these capacity payments are not tied to actual energy production, but rather represents compensation for the readiness to supply power.. In return for its commitment, these companies get whatever the auction clearing price is (i.e, the company will get paid what they bid). In 2021, Talen Energy reported that it successfully bid / secured contracts for 80% of its PJM megawatt available. This means that although the Susquehanna plant is the main driver of the fleet's total MWH production, the other PJM plants (Natural Gas and Coal) still contribute significantly to Talen’s capacity revenue [3],[6].

Another important aspect of the company's risk mitigation strategy is its hedging strategy. As a company, Talen Energy optimizes the value from its generation assets by matching its projected output from its generation assets with forward power sales in the wholesale and retail markets. To understand what this functionally means, it is important to understand how forward power markets work. Forward power markets allow electricity producers, utilities, and other market participants to enter into contracts for the future delivery of electricity at an agreed-upon price. These contracts, known as forward contracts, differ from spot market transactions, which involve immediate or near-term electricity purchases [6]. There are a few key aspects of the forward power markets: 

1. Price Stability & Risk Mitigation: Since electricity prices are highly volatile due to demand fluctuations, weather patterns, fuel costs, and regulatory changes, forward contracts allow producers like Talen to lock in prices, reducing exposure to market swings. These hedges are focused specifically on energy revenue, helping Talen manage revenue-side risk — unlike capacity revenues, which are fixed upon bidding in capacity markets. However, fuel cost exposure (like natural gas) is managed separately and was not hedged, contributing to the company’s margin pressures (as we will discuss later).

2. Delivery Commitments: Contracts specify the amount of electricity to be delivered and the agreed price, often months or years in advance.

3. Market Participants: Buyers include utilities, industrial users, and energy traders, while sellers include power generators like Talen, as well as financial institutions engaged in electricity trading.

4. Trading Hubs & ISOs: Forward contracts are traded in regional power markets such as PJM, ERCOT, and ISO-NE, which set rules for market transactions.

Talen’s hedging strategy involves forecasting its electricity production and selling a portion of it through forward contracts before the actual generation occurs. The best way to understand this is to look at an example. 

Let’s hypothetically say that in January, Talen expects its natural gas plants to generate 5,000 MWh per day in July. It sells 3,500 MWh daily in the forward market at $60/MWh, ensuring predictable revenue of $210,000 daily. However, in June, heatwaves cause spot market prices to surge to $75/MWh. If Talen has excess generation beyond 3,500 MWh, it can sell it at higher spot prices, boosting profitability. If generation is lower than expected (i.e, less than 3,500), Talen might need to buy electricity at $75/MWh to meet its commitments, potentially incurring losses. There are multiple reasons why Talen’s generation may be lower than it expected, such as plant failures in energy production or fuel delivery disruptions.

Now, consider what happens if natural gas prices rise in July. Since natural gas is the fuel input for Talen’s power plants, rising gas prices would increase Talen’s production costs. However, Talen’s forward electricity sales were locked in months earlier at $60/MWh—so while revenues are fixed, fuel costs are not. This means the company could face a margin squeeze: revenues remain unchanged, but costs rise.

This example illustrates a critical nuance: hedging electricity revenue provides price certainty on the sales side, but it does not protect against rising input (fuel) costs unless separate gas hedges are in place. As we’ll explore further below, this mismatch—combined with liquidity pressures from collateral requirements—was a key contributor to Talen Energy’s distress.

Finally, before diving into the causes of Talen’s bankruptcy filing, we will examine the company’s organizational structure. A visual depiction of this can be seen below in Figure 3, where the entities in the red outline represent the filing entities.

Talen Energy Supply

• Talen Energy Supply (TES) is the core operating subsidiary of Talen Energy Corporation, overseeing its entire power generation portfolio and wholesale electricity market activities. TES owns and manages nuclear, coal, natural gas, and oil-fired plants across multiple markets, including PJM, ERCOT, ISO-NE, and WECC. Beyond power generation, TES is responsible for financial operations, including debt management, cash flow optimization, and strategic investments. Essentially, this is Talen's business's financial and operational backbone, ensuring that power assets are aligned with market demand and risk management strategies.

Talen Generation

• Talen Generation operates Talen’s fleet of fossil fuel-based power plants across Pennsylvania, Maryland, and New Jersey, including coal, natural gas, and oil-fired facilities. This entity optimizes fuel procurement, plant efficiency, and emissions compliance, balancing cost-effective generation with evolving environmental regulations. Notably, several of its coal plants are being transitioned away from coal, aligning with Talen’s broader decarbonization strategy. Given its role in managing dispatchable power generation (electricity sources that can be turned on or off, or adjusted up or down, on demand, in response to grid needs), Talen Generation is critical for TEC to meet peak electricity demand and maintain grid reliability in its operating regions.

Susquehanna Nuclear

• Susquehanna Nuclear is Talen’s nuclear power subsidiary, operating the Susquehanna Nuclear Plant in Pennsylvania. This entity is responsible for fuel procurement, reactor operations, safety compliance, and waste management, all under the Nuclear Regulatory Commission's (NRC) oversight. The plant is a baseload energy provider, meaning it runs continuously to supply stable, low-cost, zero-carbon electricity to the PJM market. Susquehanna Nuclear manages spent fuel storage, including on-site dry cask storage expansions, ensuring long-term operational continuity. 

Talen Energy Marketing

• Talen Energy Marketing (TEM) is the trading and market-facing subsidiary of Talen Energy, responsible for selling power generated by Talen’s plants into wholesale electricity markets. This entity is the interface between Talen’s physical generation assets and financial electricity markets, ensuring that the company maximizes the value of its production.

Talen Texas

• Talen Texas operates Talen’s natural gas-fired power plants in the ERCOT market, including the Barney Davis, Nueces Bay, and Laredo plants. Unlike PJM, ERCOT is an energy-only market, meaning there are no capacity payments, and revenue depends entirely on real-time electricity sales. 

Talen Montana Holdings

• Talen Montana Holdings manages Talen’s coal-fired power assets in the Western Electricity Coordinating Council (WECC) region, primarily the Colstrip Plant in Montana. Unlike Talen’s PJM and ERCOT assets, which operate in competitive markets, Colstrip’s power sales are mainly conducted through bilateral agreements. TTalen Montana is winding down certain coal operations and facing increasing regulatory and economic pressure as renewable energy adoption grows in the Western U.S.

Talen New England

• Talen New England oversees Talen’s natural gas-fired assets in the ISO-New England (ISO-NE) market, primarily the Dartmouth Plant in Massachusetts. ISO-NE operates a capacity market, meaning power plants like Dartmouth earn revenue from energy sales and from being available to supply power when needed..

In an effort to further align its business strategy with industry trends towards decarbonization and renewable energy sources, TEC proposed the “Talen Transition Strategy” in May 2021, with its efforts being centered around 4 different categories. These categories can be seen below in Figure 4, which is from the company’s first day declaration filing [3].

The development of Data Centers and Coin Mining facilities are particularly relevant. Following the creation of the Talen Transition Strategy, the company sought investment from a variety of parties to fund this goal. However, during this search, the company was only able to find one unaffiliated company to finance “TTS” - Orion Energy Partners. Specifically, Orion agreed to fund the initial infrastructure development for the Cumulus Digital project (which entailed the data centers and the coin mining). To implement this financing, Talen Energy formed Cumulus Growth Holdings (CGH, a non-debtor entity as seen in Figure 3) as a direct subsidiary to Talen Energy corporation. Following the formation of CGH, Orion began a process to sell equity interests in the companies clean energy project development entities from Talen Energy Supply  to the newly formed Cumulus Growth Holding entities in exchange for the Cumulus preferred shares. Following this transfer, Orion financed $175mm with Cumulus Digital (which is a subsidiary of Cumulus Growth Holdings). The transfer of interests in exchange for preferred equity to Talen Energy Supply is relevant because, as of the filing date, TES still owns convertible preferred equity in certain subsidiaries of Cumulus Growth Holdings, including subsidiaries that hold the Data Centers and Coin Mining Facilities. This stake gives the debtors an economic interest in the non-debtor entities. Currently, TES has invested $54mm in the Coin Mining Facilities and $67mm in the Data Centers. However, as of the filing date, the company expected that the first phase of investments would require a total of $350mm for the Coin Mining facilities and $525mm for the Data centers [3]. 

Causes of Distress

As we will dive into below, there were two main reasons for Talen Energy’s bankruptcy filing: an under hedged strategy and extensive litigation [3].

Looking at the former, Talen’s liquidity crisis was largely driven by its under hedged position in the face of rapidly rising gas prices. Talen Energy’s business model relies on selling electricity in wholesale power markets, where prices fluctuate based on supply and demand. Because electricity prices are volatile, power producers like Talen typically hedge a portion of their expected future power generation. Hedging involves selling power in the forward market at a fixed price ahead of delivery. This strategy is meant to protect against unexpected price swings.

However, it is important to clarify that hedging does not protect against rising fuel costs - it protects against falling power prices. A generator will benefit from rising power prices if it is unhedged, but that comes with the risk of not having predictable revenues. The real challenge for Talen was not simply that it was under hedged, but the hedging strategy it did use created additional financial pressure. 

When electricity prices rose in late 2021, Talen had existing contracts in place to sell power at pre-arranged lower prices. Because prices went up after those contracts were signed, those hedges were less valuable - but Talen still had to set aside collateral to keep those contracts in place. These cash requirements are also known as margin calls. 

Importantly, the collateral requirement is a built-in feature of exchange traded hedge contracts, a financial instrument used to lock in exchange rates for future transactions. These contracts are marked-to-market daily, which means its value is re-calculated each day based on current market prices. When power prices rose above the price Talen had agreed to sell at, the company's hedge positions showed paper losses. Even though those losses might never be realized (if the contracts are held to maturity), Talen still had to post collateral to recover them. This is a standard mechanism of exchange-traded markets.

Because much of Talen’s cash was tied up maintaining those contracts, the company could not afford to enter into new contracts to lock in future high prices, leaving it increasingly exposed to whatever happened in the market. If Talen was fully unhedged, it would have made more money from the rising prices. However, because it had some hedges in place, the cost of having to post collateral outweighed any benefits that came from price increases to the company’s bottom line.

In addition, electricity prices are closely tied to natural gas prices, because gas-fired power plants set the marginal price of electricity in most U.S. power markets. The benchmark price for natural gas in the U.S. is set at Henry Hub, a major trading point in Louisiana.

From June to November 2021, Henry Hub prices rose by approximately 45%, with regional gas prices increasing by 51%. By late November 2021, natural gas prices had reached $5.45 per million British thermal units (MMBtu), compared to $3.92/MMBtu in July and $2.59/MMBtu a year earlier. This can be seen in Figure 5 below, from the company’s first day declaration filing [3].

This surge in natural gas prices pushed power prices higher, especially in PJM, where Talen primarily operates. However, it's important to distinguish between revenue and cost impacts: while electricity prices (and thus potential revenue per MWh) rose, Talen’s biggest operating input cost — natural gas — also rose significantly, increasing the cost of generation at its gas-fired plants. This dual effect made margins sensitive to whether Talen could generate and sell power at favorable spreads. As seen in the company's first day declaration, forward energy margin improved, but so did cash collateral requirements, putting enormous pressure on working capital.

To make sure all of the above points tie together, let’s take a bird's eye view at the developed situation as of mid/end of 2021 (as that is when natural gas prices rose rapidly). As we have stated before, the price of electricity (Talen’s revenue) and natural gas (Talen’s main cost) move concurrently. However, because the natural gas price increase in 2021 was unexpected, Talen Energy had already hedged a substantial portion of their electricity revenues by locking in a fixed price in the forward markets in the beginning of the year. As a result of this, two separate outcomes occurred while revenue stayed flat. First, Talen’s costs increased as natural gas prices rose, leading to a cost squeeze. Additionally, the increased prices forced Talen to post collateral to maintain positions on existing positions, which acted as a liquidity drain.

In Figure 6, the Debtor’s also noted that the uplifted forward energy margin would strengthen Talen’s forecasted 2022 Adjusted EBITDA. Because Talen had not yet locked in electricity prices on the forward market for 2022, they could benefit from the rising electricity prices in the following year. However, for the 2021 period, Talendid not benefit from the electricity price increase; Talen instead had locked in electricity sales prices through forward contracts, but rising gas prices raised the cost of production — and simultaneously caused the mark-to-market value of its hedges to fall, triggering collateral posting requirements. These collateral requirements were not tied to realized losses but to daily market fluctuations, effectively squeezing Talen’s liquidity.

Generally, power producers will hedge their sales in two main ways [3]:

• Exchange-Traded Hedges – These are standardized financial contracts traded on commodity exchanges like the New York Mercantile Exchange (NYMEX). They are highly liquid, meaning they can be easily bought or sold, but they require posting collateral (cash or other assets) as a guarantee. If prices move against the company, additional margin calls (collateral demands) must be met. To clarify once more, collateral is required because these contracts are settled daily based on current market prices. If the market moves against a company’s position, it must pay cash upfront to maintain the position, even if the actual revenues from power sales have not changed yet.

• Bilateral Hedges – These are private agreements between two parties, such as Talen and a utility or financial institution. They are less liquid but require less upfront cash collateral.

Talen historically relied on exchange-traded hedges to lock in forward electricity prices. However, when electricity prices surged, Talen’s exchange-traded hedge positions moved “out of the money”, meaning the market price had risen far above the price at which Talen had hedged. This triggered margin calls, requiring Talen to post large cash collateral to cover the difference in value [3]. 

As a result of these margin calls, Talen’s cash reserves were drained at an unsustainable rate. By October 2021, the company’s collateral requirements had soared to $451 million, forcing Talen to make massive cash payments to maintain its hedging positions (for reference, prior to 2021, Talen generated approximately $600mm in adjusted EBITDA). This was not because the business itself was unprofitable, but rather the structure of the contracts forced the company to tie up large amounts of cash to keep them active, even if the losses were only on paper. This can be seen in Figure 7 below, from the company’s first day declaration. 

By late 2021, Talen stopped using exchange-traded hedges and shifted toward bilateral hedges, which required less upfront cash. However, due to its severe liquidity constraints, the company could not hedge enough of its future electricity sales, leaving it fully exposed to market fluctuations.

Talen initially expected power prices to remain strong into early 2022, which would have offset its liquidity problems once it started selling electricity at higher rates. However, this didn’t happen.

• Day-ahead and real-time prices in PJM and ERCOT fell below projections, further reducing expected cash flows (see Figure 8 below, from the first day declaration)

• Talen no longer had enough hedging contracts in place to lock in favorable prices

At this point, Talen was in a financial death spiral—it had too little liquidity to hedge, too much market exposure, and declining power revenues. In December 2021, Talen secured an $848 million first-lien revolving credit facility, known as the Accordion Facility, to address its escalating liquidity crisis. The company intended to use this financing to stabilize its operations amid mounting collateral requirements and upcoming debt maturities. A significant portion of the proceeds was allocated to repay outstanding principal and interest on its revolving credit facility (RCF), ensuring that existing debt obligations were met while maintaining access to necessary credit lines. Additionally, Talen used the facility to post cash collateral for its hedge positions, which, as we have discussed, had become increasingly expensive as natural gas prices surged, forcing the company to cover substantial margin calls [3].

Further, Talen believed the Accordion Facility would provide sufficient liquidity to carry the company through the critical winter months of 2021-2022, allowing it to benefit from high power prices and negotiate a potential restructuring agreement with creditors. However, milder-than-expected winter conditions led to lower electricity demand and declining power prices, significantly reducing expected revenue. As a result of the weak cash flow positions as a result of the 2021 price increases and the decline in expected revenue from mild winter months, the company was forced to file for Chapter 11 bankruptcy in May 2022.

In addition to Talen’s under hedged costs, the company was saddled with litigation in the years leading up to its bankruptcy filing. We will look at each of these cases below [3]:

• Winter Storm Uri Litigation: Talen Texas faces multiple lawsuits stemming from Winter Storm Uri in February 2021. Plaintiffs allege that Talen failed to properly winterize its plants, contributing to outages and widespread power shortages. The lawsuits highlight ERCOT’s market design, where generators depend on real-time electricity sales rather than capacity payments. Legal proceedings are still ongoing.

• Kinder Morgan Litigation: In June 2021, Kinder Morgan sued Talen Energy Marketing and affiliates over a disputed gas supply contract during Winter Storm Uri. Kinder Morgan claims Talen failed to honor a gas purchase agreement amid surging prices. Talen disputes the claims, citing lack of a binding contract and extreme market volatility. 

• PPL/Talen Montana Litigation: In 2018, the Talen Montana Retirement Plan sued PPL over a $733 million distribution following the sale of Talen’s hydro assets, alleging it left Talen undercapitalized. PPL countersued, and after nearly five years of litigation, the parties settled for $115 million in December 2023. Talen’s bankruptcy influenced the timing of the resolution. Talen’s bankruptcy filing influenced PPL’s decision to settle in May 2022, which diminished PPL's ability to recover on counterclaims.

Chapter 11 Bankruptcy

The litigation issues paired with the company's hedging losses led TEC to file for Chapter 11 bankruptcy in May 2022. The company’s capital structure as of the filing date can be seen in Figure 9 below. We will also discuss each tranche in further detail below.

The Talen Revolving Credit Facility (RCF), sized initially at $1.85 billion, was reduced to $459 million following multiple amendments. The facility is governed by a credit agreement dating back to June 1, 2015, with Citigroup serving as the administrative agent and collateral trustee. Unlike traditional revolving credit facilities that provide direct access to cash, the Talen RCF is now exclusively used for issuing letters of credit (bank guarantees that ensure payment to a third party if Talen fails to meet certain obligations), with $458 million in outstanding undrawn letters of credit backed by $89 million in cash collateral. As a senior secured revolving facility, the RCF ranks pari passu with other first lien secured obligations, ensuring repayment priority in the event of liquidation [3],[4].

The Accordion Facility, a $848 million senior secured revolving loan facility, was structured as an emergency liquidity backstop in December 2021, just months before Talen’s bankruptcy filing. This facility carries an interest rate of 7.00% along with a 4.50% per annum commitment fee on unused amounts. The Accordion Facility ranks equally with the RCF and other first-lien obligations, backed by first-priority security interests in substantially all TES assets [3]. 

The 2026 Term Loan B (TLB) is a $500 mm senior secured term loan originally issued in July 2019. The facility bears an interest rate of LIBOR + 3.75% and is backed by the same first-lien security package as the RCF and Accordion Facility. As of the bankruptcy filing date, $428 million remained outstanding on the term loan. Despite carrying equal ranking among first-lien obligations, term loans typically provide less flexibility than revolvers, as they cannot be redrawn once repaid [3].

The Senior Secured Notes issued across three tranches total $1.62 bn and carry varying interest rates and maturities. The 2027 Secured Notes amount to $750 million at 7.25%, the January 2028 Secured Notes total $470 million at 6.625%, and the June 2028 Secured Notes total $400 million at 7.625%. These notes rank pari passu with Talen’s other first-lien obligations, ensuring full access to the company’s collateral package in the event of default. This is depicted in Figure 10 below.

The Senior Unsecured Notes, issued in multiple tranches between 2022 and 2036, total $1.33 billion and range in interest rates from 6.00% to 10.50%. The most significant issuances include the 2025 Senior Notes ($543 million at 6.50%) and the 2026 Senior Notes ($607 million at 10.50%), which carried high yields reflective of investor concerns over Talen’s credit quality. Unlike secured debt, these unsecured notes lack direct collateral claims, meaning recoveries in bankruptcy are significantly lower. This is depicted in Figure 11 below.

The PEDFA Bonds, issued by the Pennsylvania Economic Development Financing Authority (PEDFA) on behalf of Talen Energy, amount to $231 million across three series. The Series A Bonds ($100 million at 6.40%) mature in December 2038, while the Series B and C Bonds ($50 million and $81 million, respectively) carry 0.90% rates, also maturing in the late 2030s. TES backs these bonds through various loan agreements, but their municipal structure allows them to benefit from certain tax advantages, making them an attractive financing tool. However, despite these advantages, their unsecured status places them lower in the recovery hierarchy. This is depicted in Figure 12 below.

In advance of Talen Energy’s bankruptcy filing, most of the company's creditors organized into three different groups: the secured lender group, the crossholder group, and the unsecured notes group. One of the interesting aspects surrounding this case was the misinterpretation of who the fulcrum security would be in advance of the bankruptcy filing. For reference, the fulcrum security is the security that is the first impaired in the capital structure (i.e, everyone sitting above the fulcrum would receive 100% recoveries). Now, in advance of Talen Energy’s bankruptcy filing, the unsecured notes trading prices told a different story than what actually happened. The trading price action of the 2026 unsecured notes (which was similar to the other notes in the unsecured note tranche) can be seen below in Figure 13.

In the pre-filing negotiations, the unsecured notes were trading into the 20s, and market participants assumed that the secured pieces of debt would be the fulcrum security. As a result of this, the company initially began its negotiations with the secured group (who held 70% of the secured debt) and the crossholder group (who held 30% of the secured debt and 12% of the unsecured debt). Each of these groups made differing proposals initially. The secured group first proposed a transaction that would have these lenders taking over the business (with a minimum of take-back debt in the reorg entity). However, this proposal would have the unsecured debt completely impaired, and the crossholder group wanted some recovery on its unsecured debt, so it proposed a higher exit valuation with larger take-back debt for the reorg entity [1].

The unsecured notes group formed much later after the other two groups, and provided a third proposal, one which had a significantly higher exit valuation for Talen Energy that would make the unsecured debt the fulcrum security in the capital structure. Under this proposal, the unsecured notes group proposed an equity rights offering of up to $1.65bn, backstopped by certain members of the unsecured noteholder group. 

Additionally, as the company filed for bankruptcy, it raised $1.76bn in DIP financing, which consists of a $1 billion new-money term loan and $300 million revolver, as well as the continuation of Talen’s $458 million letter of credit facility (this $458mm represents the roll-up amount) [3]. 

Before we dive further into the Restructuring Support Agreement, we wanted to take a moment and discuss how a rights offering functions (as Talen Energy’s restructuring was centered around this mechanic). 

A rights offering is a way for a company to raise new capital from existing creditors or equity holders in its capital structure. While not exclusive to distress, rights offerings are frequently used in Chapter 11 cases because distressed companies struggle to raise financing from outside lenders due to their weakened financial condition. Instead of seeking new investors, a company can turn to its existing stakeholders and offer them the chance to purchase part of the reorganized company’s equity at a discount to its expected post-reorganization valuation. It’s important to note that rights offerings can involve both debt and equity issuances, but the focus here will be on equity rights offerings (EROs), which are more common in restructuring situations. The core mechanics of an ERO revolve around providing existing creditors the opportunity to purchase equity in the post-reorganized entity at a discount, increasing their recovery while injecting fresh capital into the company.

A rights offering is typically structured around a discount to the Plan Equity Value (PEV)—the estimated value of the reorganized company once it emerges from bankruptcy. This discount acts as a financial incentive for creditors to participate, as it provides them with immediate paper gains on their investment.

To illustrate, let’s assume a company undergoing Chapter 11 is expected to have a Plan Equity Value of $500 million post-reorganization. The company has $200 million of secured creditors and $200 million of unsecured creditors, and it needs to reduce its debt burden to emerge as a viable entity. To facilitate this, the company could offer $200 million of its equity to the secured creditors at a 20% discount, meaning they effectively purchase $200 million worth of equity at a $400 million valuation rather than $500 million. This discount allows secured creditors to own 50% of the company’s post-reorganization equity rather than just 40%, giving them an extra 10% of equity for no additional cost. The $200 million in proceeds from the rights offering is then used to repay the secured creditors, effectively eliminating them from the capital structure. In a distressed scenario, multiple creditor classes may compete over control of the reorganized entity, and different rights offering proposals may offer varying levels of discounts based on how negotiations unfold. A lower discount means less dilution for existing equity holders, while a higher discount provides greater incentives for creditors to participate.

A key risk in any rights offering is the possibility that not all eligible creditors or equity holders will participate, leaving the company short of its intended capital raise. To address this, companies negotiate backstop agreements with a subset of stakeholders—typically the largest holders in a creditor class—who commit to underwrite all or part of the offering.

Backstop parties agree to purchase any unsubscribed shares, ensuring the full rights offering is funded. In return, they often receive additional economic incentives, such as:

• The ability to purchase backstop shares at a deeper discount than other participants

• A guaranteed allocation of the rights offering (holdback mechanism)

• A separate backstop fee, typically in equity, cash, or debt

For example, if a company is looking to raise $500 million through an ERO, it might offer a group of creditors the chance to backstop $100 million of the offering at a 40% discount, while the remaining $400 million is available to all participating creditors at a 20% discount.

The backstop group benefits in two ways:

• They get a larger equity allocation by purchasing at a steeper discount (40% vs. 20%).

• They participate in the general rights offering, still receiving the standard discount on additional equity.

At first glance, it might seem counterintuitive for creditors to prefer receiving equity instead of cash in a restructuring. However, there are several reasons why creditors would actively choose to participate in a rights offering rather than accept a partial cash payout:

• Upside Potential – Equity provides an opportunity to benefit from the future success of the reorganized company, rather than accepting a fixed cash recovery with no further value appreciation.

• Discounted Purchase Price – As explained earlier, creditors are acquiring equity at a discounted valuation, making their ownership stake immediately more valuable.

• Guaranteed Equity Through a Backstop – If a creditor participates as a backstop provider, they receive additional free equity, making participation even more attractive.

Because backstop parties are guaranteeing funding for the rights offering, they are compensated through a backstop fee. This fee is typically paid in equity, although it may also be structured as cash or debt. The size of the backstop fee depends on multiple factors, including the size of the backstop commitment and the overall risk in funding the deal. Backstop fees typically range between 8-10% of the total rights offering and increase for longer-dated backstops due to higher uncertainty.

To illustrate, let’s assume a backstop group guarantees $100 million of a $500 million rights offering, and the negotiated backstop fee is 9% of the total offering. This means the backstop participants will receive an additional $45 million of equity (9% of $500 million) for free, in addition to the discounted equity they are already purchasing.

Finally, rights offerings will often feature a holdback mechanism. A holdback ensures that backstop parties receive a guaranteed allocation of equity, regardless of overall demand in the rights offering. This is particularly relevant when a company undergoes restructuring, as different creditor groups often compete for post-reorganized equity. The holdback guarantees that a certain percentage of the rights offering is reserved exclusively for the backstop participants, protecting them from dilution caused by high participation from other creditors.

The economic impact of a holdback depends on who is providing the backstop:

• If the backstop is provided by creditors who hold 100% of the eligible claims in the rights offering, the holdback has no effect on the distribution of equity. Since these creditors already control all eligible claims, there is no dilution—it’s simply a reallocation among the same creditor group.

• If the backstop is provided by a third-party investor (someone outside the creditor class), the holdback results in dilution to the other stakeholders. In this case, the third-party backstop group is receiving an exclusive allocation of equity, reducing the percentage available to other creditors or equity holders in the capital structure.

To illustrate, assume a company is conducting a $500 million equity rights offering, and the backstop group negotiates a holdback provision that guarantees them 25% of the total offering. This means that even if other creditors fully participate, the backstop group will still receive their 25% guaranteed equity allocation, ensuring they do not get diluted.

Back to the Restructuring Support Agreement, the rights offering was made to be available to all unsecured noteholders backstopped by certain unsecured noteholders. Additionally, the RSA called for a rights offering discount of 25% (assuming a $4.5bn total enterprise value at exit), a backstop amount of $1.3bn, a backstop fee of 20% (which could be payable in discounted equity), and a holdback of 30%. Further, the proposed plan called for the net debt at emergence to total $1.5bn, with at least $1bn in a priority exit revolving cash flow facility for additional liquidity purposes. Further, as a part of the rights offering, the secured debt holders would either be repaid in full in cash with the proceeds from the capital raised from the rights offering and the exit debt facilities or have the option to roll their debt into new exit debt of the post-reorg company. Finally, the RSA called for the unsecured notes to receive 100% of the common equity, subject to dilution [3]. 

Let’s take a step back and broadly look at how the capital structure is being restricted under the RSA proposal. When the company filed for bankruptcy, it filed with approximately $2.9bn in secured debt and approximately 1.6bn in unsecured debt, for a total of $4.5bn. Under the RSA, the company planned to have a rights offering that would raise approximately $1.7bn in capital, which would be used to repay the part of the secured creditor group (remaining capital rolled over into exit debt). The company planned for exit debt of $1.5bn, and a total exit EV of $4.5bn, meaning that because the secured creditors were repaid in full via cash and take-back paper, the unsecured creditor group would receive the full $3bn of equity post-reorg. As seen in Figure 14 below, Talen Energy’s capital structure completely changed, with prep-petition equity holders having their claims completely wiped out (and new equity going to the unsecured debt holders).

Although the debtors filed for bankruptcy with the RSA proposed by the unsecured noteholder group, Talen still needed to gather support among various constituents. At filing, the company only had 62.3% of the value of the existing unsecured bonds in support of the plan, but needed 66.67% to approve the plan. Additionally, the secured creditors were also concerned about the proposed plan. These concerns primarily centered around valuation, specifically the company’s ability to generate cash flow during the case and whether the debtor would be adequately able to hedge current pricing (which would significantly affect the valuation of the post-reorg entity) [6].

To overcome these valuation concerns from the creditors, the unsecured noteholder group benefited from third-party bids. Taking a step back and looking at valuation holistically, a company can determine its valuation 3 different ways. First, it can determine it technically, using methods like a DCF or comparable company analysis to determine the ‘intrinsic’ value of the company. A second method to determine valuation is via negotiation. This method is particularly relevant to distressed situations as creditors and the company are continually negotiating on what the post-reorg entity will look like (in terms of debt and equity). As these groups negotiate while trying to determine a restructuring to push the company forward, the various restructuring proposals will often trend towards a certain valuation that the constituents can agree upon. Finally, a company can engage in a market-testing method to determine its valuation - specifically via third party bids. If a company is looking to sell its company, buyers will be willing to pay various prices. This price can include premiums (stemming from synergies the buyer believes it can achieve with the merged entity or simply a premium to represent the higher valuation of the company itself). In the case of Talen, when it filed for bankruptcy, the company received a bid for $4.5bn (undisclosed buyer). This third-party bid led to increased negotiations / alignment on exit valuation among the constituents, as if a company would pay a certain value for Talen in an outright purchase, the unsecured group could argue that $4.5bn is a representative value of the company to base the plan off of. While none of the bids for Talen Energy were actionable, this helped reduce the concerns around valuation from the secured creditor group [1],[6].

With the third-party valuation completed, the unsecured creditors were able to effectuate their proposed rights offering. However, while most of the terms in the RSA remained the same surrounding the rights offering, the amount provided was reduced to $1.4bn versus the initially proposed $1.65bn. Additionally, the company raised a new term loan B, C and new secured notes. The total sources and uses of the bankruptcy process can be seen in the Figure below.

Importantly, the DIP claim is represented as $1bn as it only represents the term loan portion of the DIP facility. The $300mm revolver portion remained undrawn, and the $458mm represented the roll-up amount, not new money financing. The post-reorganization capital structure can further be seen in Figure 16 below.

There are a few important notes to highlight about Talen’s new capital structure. First, in addition to the TLB, TLC, and secured notes that were raised, the company also raised $700mm in an exit revolving cash flow facility. Additionally, the Incremental TLB was refinanced from the existing debt pre-reorganization. Regarding the PEDFA bonds, per the Restructuring Support Agreement, only the Series B and C bonds (totalling $131mm) were allowed to be reinstated in the capital structure, with the remaining $100mm being part of the GUC claims [1]. On a final note, the exit financing amount of $2.7bn differs from the 1.5bn proposed in Figure 14 as that was the RSA proposal, which was subjected to changes based on the valuation arguments.

Finally, let’s look at the recoveries of the constituents in the capital structure. The $1bn of DIP claims and the $3.2bn of 1L debt will be repaid 100% in cash (the $3.2bn represents the pre-existing $2.9bn plus additional post-petition interest). The $1.3bn of unsecured debt will be receiving a recovery of approximately 33% (with its recovery coming in the form of post-reorg equity). The GUC claims (representing a total of $300mm stemming from the PEDFA A bonds and other trade claims) will receive an 8% recovery from a cash pool of $26mm. Finally, the pre-existing equity holders (which in this case was solely Riverstone Holdings), will receive 1% of the post-reorg equity plus 5% in warrants in the post-reorg equity as well [1].

Talen Energy - A Case of Continued Performance

One of the most fascinating aspects of Talen Energy’s restructuring was its continued success after its emergence from Chapter 11 Bankruptcy in May of 2023. The company emerged from bankruptcy by being listed on the stock market (NASDAQ: TLN). A chart depicting Talen’s equity value  can be seen in Figure 17 below.

Since its emergence on the public market, Talen Energy has returned over 430% in less than 2 years. The reasons for this success can be broken down into two main reasons: its financial outperformance and strategic asset sales.

Since the company has emerged from bankruptcy, it has continually beat expectations across all financial metrics (which is a fantastic catalyst for a stock’s price, especially for a company that had just re-emerged from bankruptcy at likely a discounted valuation). In Q3 2024, the company reported earnings per share (EPS) of $3.16, marking a substantial improvement from a loss of $1.30 per share in the prior year. Revenue grew 26% year-over-year to $650 million. Alongside these results, Talen raised its 2024 adjusted EBITDA guidance to a range of $750–$780 million, reflecting stronger-than-expected margins and a favorable pricing environment for its electricity supply contracts. Looking ahead, the company estimated a  40% increase over 2024 results for 2025, with adjusted EBITDA between $925 million and $1.175 billion [5].

With regards to the company’s strategic asset sales, there were two main events in 2024 that generated over $1.4bn in value and acted as another key driver of the company’s financial outperformance:

• Cumulus Data Center Sale to Amazon: In March 2024, Talen sold its Cumulus data center campus to Amazon for $650M, representing a substantial return for Talen energy on its Data Center investments [8]. This transaction is a fantastic example of how a company can successfully turn around its business and continue to create value post-reorganization. Specifically, it emphasizes the value that is currently being created by integrating clean, reliable nuclear power with scalable digital infrastructure (recall the Cumulus data center was created under a strategic move initiated under Talen’s Cumulus Growth platform). The Cumulus Data Center offers AWS access to a direct source of carbon-free baseload energy, which aligns with Amazon’s net zero goals. Not only did this sale generate meaningful proceeds for Talen Energy, but it also demonstrated the monetization potential of co-locating data center infrastructure with nuclear generation.

• ERCOT Generation Portfolio Sale: Around the same time, Talen also divested its Texas-based ERCOT generation assets to CPS Energy for $785M. This helped to improve the company's liquidity position, and more importantly, reduce exposure to volatile wholesale electricity markets. This freed up capital allowed Talen Energy to focus on its core power generation business with a stronger emphasis on data center and industrial power solutions [9].

An important question to consider when looking at the case of Talen is, what feature makes a restructuring so successful? Yes, the above reasons are required for any company to continue to perform post-reorganization, but the fundamental reason for Talen Energy’s resurgence was the case of a good company, bad balance sheet. Looking back to the company’s causes of distress, we noted one of the main reasons being a significant liquidity crunch - caused not just by under-hedging, but more critically by the heavy collateral demands tied to exchange-traded hedges during a period of rapidly increasing energy prices. The restructuring process gave the company the breathing room to stabilize its financial obligations and also to revise its hedging approach. Specifically, Chapter 11 allowed Talen the time and capital flexibility (including protection via the automatic stay) to move away from cash-draining hedge structures and begin implementing a more sustainable hedging strategy. Rather than being trapped by the collateral burdens of exchange-traded contracts, Talen could now enter hedging arrangements—such as bilateral hedges—that provided revenue certainty without depleting cash reserves. By fixing both its balance sheet and its risk management approach, Talen was better positioned to weather energy price fluctuations. As energy prices moderated, the company was no longer exposed to extreme liquidity strain—and could benefit more consistently from market conditions.

For an effective restructuring to take place, a company must resolve its outstanding obligations. If Talen just fixed their hedged positions but did not resolve their capital structure, they likely would end up in another restructuring due to pressure to liquidity from a burdensome capital structure (especially with a rapidly increasing interest rate environment). However, to truly have a turnaround success story like Talen Energy, a company needs to be fundamentally strong - something that is not the case for many of the companies that go through restructuring processes.

Sources: [1],[2],[3],[4],[5],[6],[7],[8],[9]

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