TXU (renamed Energy Future Holdings), one of the largest LBOs undertaken during the 2006-2008 buyout boom, is back in the news. Last week the company proposed an extension to the maturity on roughly $20 billion of term loan debt. In return for the three year extension, they are offering a massive up-front fee of 350bps and a step-up in the interest rate of 100bps. A recent Bloomberg entitled, “TXU Bill to Avoid Default May Top $1 Billion,” gives us a picture of the absurdity.1 They are paying up to an extra billion dollars to roll the ball forward and hope that somehow the structure will work in a few years?
As the article states, “If you have a $1 billion loan, you can be like a speedboat and dodge the icebergs. If you have $20 billion, you’re the Titanic. You’ve got icebergs coming and it is very difficult to move.” 1 That’s the problem with many of the massive issuers in the high yield bond and loan space—they are so big relative to the market. This is compounded by the fact that most of these huge deals were done during the 2005-2006 buyout frenzy when multiples were well above norms. As in TXU’s case, this is an example of a capital structure that left no room for error (which of course was ill-timed as electricity prices and the company’s revenues have dropped significantly since 2008)…and even if numbers had carried on as expected, I am still not so sure the structure would have worked.
In addition to the $20bil in loans, TXU also has nearly $15bil in bonds issued. This is a prime example of the sorts of names in which the index products/passive products are forced to invest, and invest in size because they are huge deals relative to the entire market. Credit-default swaps for TXU’s debt are indicating that there is a 73% chance of them defaulting in the next five years1, yet index based products have to invest in it just because it exists. Makes me glad to be an active manager and able to exercise our own discretion in avoiding some of these deals!
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