Bonds of Energy Future Holdings Corp., the largest leveraged buyout in history, are tumbling as a drop in natural gas prices could make it harder for the company to meet debt payments.

Notes of the Dallas power company lost 10.1 percent last month, the largest decline among the 50 biggest issuers of junk-rated corporate debentures in the U.S., according to Bank of America Merrill Lynch data. That followed a 3.66 percent drop in the second half of July.

Investors are speculating that the 22 percent decline in natural gas prices in August, the most since July 2008, will curb EFH revenue. Wholesale power prices follow natural gas markets, so higher gas prices equals more money for EFH.

"They live and breathe in a market that prices off of natural gas," said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, N.M., which oversees about $60 billion in assets, including Energy Future loans.

"They just don't make enough money to service all that debt. At $8 gas they do, at $4 gas, they don't," he said.

Private equity companies Kohlberg Kravis Roberts & Co. and TPG bought the Dallas power company in 2007 for $48 billion, and loaded it up with debt, in a deal that amounted to a big bet on natural gas prices. EFH now has about $38 billion in long-term debt.

EFH corporate bonds dropped in value last month, but bonds issued by the company's regulated power line unit, Oncor, didn't. Some Oncor bond issuances gained value in August, a month when some analysts again began speculating that EFH is preparing to sell the unit. EFH owns 80 percent of Oncor.

Oncor is the one unit of EFH whose revenue isn't subject to natural gas markets.

Revenue from those two units rose a bit in the second quarter as the company sold more power. Still, prices were lower than the year before.

Moody's Investors Service says EFH already faces a "very weak financial profile, untenable capital structure, questionable long-term business plan and material operating headwinds."

Natural gas for October delivery fell 5 cents, or 0.29 percent, to $3.75 per million British thermal units Wednesday on the New York Mercantile Exchange. Prices for the fuel have dropped about 72 percent since futures reached $13.58 per million British thermal units in July 2008, 17 months after the acquisition was announced.

EFH's nearest "significant debt maturity" is 2014, said Lisa Singleton, a company spokeswoman. The company has more than $25 billion maturing through 2014, according to data compiled by Bloomberg News.

The drop in bond prices could be an opportunity for EFH to buy back or exchange more debt. The company has been acquiring its own debt at prices below par – a move that rating agencies call default, since EFH isn't paying back the full loans.

Staff writer Elizabeth Souder,

Bloomberg News