2007's "Mega LBO" Set To File Prepackaged Bankruptcy

When news hit the tape in February of 2007 that TXU would be acquired by a consortium of PE firms including KKR, TPG and Goldman, for the mind-boggling price of $45 billion, to this day the biggest LBO in history, there were those who were morbidly excited about the future as money was flowing freely, bonuses would hit a record, and there was only upside, and then there were those who knew this was the can’t miss top-tick indicator of the beginning of the end. The latters ones turned out to be right. And not only because a year later the entire financial system imploded and only a $25 trillion global coordinated bailout prevented the collapse of the western way of life as we know it, but because now six years later, in the worst kept secret of Wall Street of the past month, TXU, now known as Energy Futures Holdings, is on the verge of the ultimate humiliation for private equity investors: Chapter 11, and a complete wipe out of not only the equity but major impairment of the debt holders as well.

WSJ with the gruesome details:

Energy Future Holdings Corp., the struggling Texas power company at the center of a record private-equity buyout six years ago, has proposed a prepackaged bankruptcy plan to senior creditors that would eliminate more than $30 billion in debt at one of its subsidiaries, said people familiar with the matter.


The company plans to disclose the restructuring proposal as soon as Monday afternoon or evening, though the timing could be delayed, the people said. Any bankruptcy filing would be months away.


Under the contours of the current proposal, senior creditors of Texas Competitive Electric Holdings—an unregulated subsidiary that sells power in a competitive wholesale market—would forgive roughly $25 billion in debt for ownership stakes in the parent company, Energy Future Holdings, the people said. Senior creditors would also get about $5 billion in debt or new cash as part of the proposal, the people said.


The company hasn’t yet reached an agreement with senior creditors on the proposal

The reason for the bankruptcy? The one, simple underlying “value creation” bet that everyone took for granted: that nat gas prices would soar. They didn’t.

The buyout firms took the former TXU private in a record deal for $32 billion and about $13 billion in assumed debt in 2007, betting that natural gas prices would rise and the company would be able to charge more for electricity. Instead, prices fell and the company lost more than $18 billion between 2007 and 2012. Owners have written their investments in the company down to nearly zero.

Well, that, and about 12x debt/EBITDA which magnified the impact of the continued weak natgas environment to the point where there was no hope of survival the company in its current form.

Luckily, fast forward to today, when the liquidity tsunami is orders of magnitude greater than it was even in 2007, and one can see why instead of learning from their mistake, all of equity sponsors have decided to double down and throw even more good money after bad:

The parent company’s owners, including KKR, TPG and Goldman Sachs Group Inc.’s private-equity arm, as part of the proposal are willing to invest more money in Energy Future Holdings, the people said. They could end up retaining some ownership in the company as part of the proposal, they said.

Fast forward another 6 years when all the newly invested money is once again gone, but thanks to the Fed (assuming there is one) the incremental cost of capital is none or even negative.

As for TXU, all that will happen is a slightly lower fresh start cap table, with what some bankruptcy advisory firm has projected is a sustainable 5 year plan. It won’t be, and the debt will pile on and on, in one after another dividend recap deal, until the company once again files for bankruptcy, and its employees pray that this time it won’t be the dreaded Chapter 7 liquidation filing.

Energy Future Holdings hopes to file a so-called prepackaged bankruptcy in coming months if it can reach an agreement with creditors, some of the people said. The company plans to pay roughly $270 million in interest due to bondholders on May 1, in part to buy more time to negotiate the bankruptcy restructuring, according to people familiar with the matter. Some senior creditors aren’t keen on the planned payments, since the money goes to bondholders ranking behind them in the event of a bankruptcy, some people familiar with the matter say.

And so nothing changes with every turn of the business cycle (that is before the Fed did away with that completely), and with ever more free money sloshing around, nobody ever learns from their mistakes, and nothing is sure to change again.


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