If there was one deal that epitomized the last credit bubble, aside from the Blackstone IPO of course, it was the ginormous, $45 billion 2007 LBO of TXU, now Energy Future Holdings. And while the tide for the New Abnormal credit bubble has yet to expose its megalevered monoliths swimming fully naked, as for now corporations have opted for graduated semi-MBOs in the form of ever larger stock buybacks (although as rates rise this too day of reckoning is coming), the time to pay the piper for the last credit-fuelled binge has arrived and inevitable bankruptcy of this landmark deal is now just days away. From the WSJ: “Energy Future Holdings Corp. has begun sounding out banks for financing to help it operate during expected bankruptcy proceedings, which could come as soon as November for the Texas power producer.”
The losers (in addition to the thousands of company employees who were and are about to be laid off): all those who invested equity in hopes nat gas prices would rise, and even looser credit would mean a quick and profitable flip in the next 3-5 years, namely KKR, TPG, as well as Lehman (RIP), Citigroup, and Morgan Stanley. These banks were also instrumental in underwriting (and holding on to) the loans and bonds that would fund this monster deal, which ultimately led to unprecedented writedowns for all those involved. The irony: the same companies that provided the LBO financing, will also now serve as the source of the company’s $2+ billion DIP loan, so all is well with the world.
The Dallas-based company—formerly called TXU Corp. and once at the center of the largest-ever private-equity buyout—within the last week or so started discussions with Citigroup Inc., J.P. Morgan Chase & Co. and other banks in pursuit of more than $2 billion in so-called debtor-in-possession financing, said people close to the deliberations. The discussions are in early stages, and the size and the structure of the loan could change, these people said. Such loans give companies under bankruptcy protection additional money to fund operations and other obligations and are usually negotiated about four to six weeks before a Chapter 11 filing.
The company, whose org chart was a 5 by 7 foot nightmare for many a analyst, will first see its TCEH subsidiary which sells power in the wholesale market file its $32 billion in debt first. As for Energy Future, which carries more than $40 billion in debt, the WSJ says it is “racing to negotiate a prepackaged bankruptcy plan with creditors at that subsidiary and another one in an effort to avoid a prolonged stay under Chapter 11 protection. If successful, the creditors would agree to a reorganization plan ahead of a bankruptcy filing, setting Energy Future up for a speedier trip through bankruptcy court. Without a prepackaged deal, the company would have to negotiate a restructuring plan after seeking bankruptcy protection, a process that could lengthen its stay in court.”
The successful resolution of a prepack depends on the various stakeholder entities, most of which will be equitized, ultimately agreeing on just where they see the industry, and the price of nat gas going. After all, it was the plunge in natural gas prices after the LBO to record lows that led to $18 billion in losses in the five years following the LBO, and coupled with unprecedented leverage, resulted in what now appears to be the inevitable largest bankruptcy filing since 1980.
Luckily, the investing community has learned from its past mistakes and is no longer loading up quality companies with epic amounts of debt.
But who cares: after all it is all other people’s money.