Banks may be jittery about TXU deal
By JIM FUQUAY
Aug. 01, 2007
Star-Telegram Staff Writer
star-telegram.com
Could turbulence in the financial markets unravel the $46.7 billion buyout of TXU Corp?
That possibility emerged Tuesday when Thomson Financial, citing unnamed sources, said banks led by Citigroup might pay a $1 billion break-up fee rather than follow through on commitments to provide more than $37 billion in loans.
Later in the day, The Associated Press and Bloomberg News quoted their own unnamed sources, who said the banks were still onboard. The parties all declined to comment.
Many experts said the deal was still likely to close. In a research note, Wachovia Capital Markets said that while it's not surprising that the banks would review their options, the buyout was likely to proceed.
Investors seem to have doubts about the deal. After climbing as high as $68 a share in early July, TXU's shares (ticker: TXU) have slid -- along with the rest of the stock market -- in the past two weeks, closing Tuesday at $65.25 a share, down 1 percent for the day and well short of the $69.25 buyout price.
At issue is the difficult market for corporate debt, especially higher-risk debt. The credit markets have been spooked in recent weeks. Rising losses in subprime lending led to a big sell-off on Wall Street in recent days. Rising interest rates have hit the bond market, and financing for many proposed buyouts has tightened up.
The private-equity buyout boom of recent years has produced a booming supply of debt to finance those deals, and as recently as last month there was a ready market for all that debt.
But now there is a backlog of about $235 billion in loans, mostly related to buyouts, waiting to be sold by banks and investment bankers, according to Standard & Poor's. The bankers made the original loans and now want to sell them to other investors, collect a fee and use the money to fund more loans.
That's where the bottleneck occurs. Investors, wary of rising interest rates and turmoil in the market for mortgage-backed securities, are demanding better terms for what they see as higher risk. If the loans don't carry an interest rate that reflects today's more expensive market, investors want a discount.
"Nobody's going to want to buy that debt at par," or face value, said Scott MacDonald, director of the Southwest Graduate School of Banking at Southern Methodist University. Subprime mortgage financing, which has suffered big losses, "is on everybody's mind," MacDonald said. Couple that with "the volatility of the stock market, and risk premiums have gone up."
For example, Cerberus Capital Management's $12 billion buyout of Chrysler was delayed after Cerberus declined to pay higher interest rates and the financing banks couldn't sell the debt. DaimlerChrysler, which is selling Chrysler, ended up taking nearly $2 billion of the debt to help move the transaction, according to media reports.
On Tuesday, S&P reported that Chrysler Finance was offering its loans at 95 to 96 cents on the dollar.
"Right now, the reception for any kind of debt has gotten tough," said Stan Block, professor of finance at Texas Christian University.
"The high-yield capital market has taken as hard a hit as the stock market," Block said Monday, noting that it was the first day in a couple of weeks that bonds hadn't lost value.
From the day that an investment group led by TPG and Kohlberg Kravis Roberts & Co. announced its $46.7 billion buyout of TXU, including assumption of TXU's existing debt, it's been a given that the deal was going to require a lot of debt. The investors have pledged at least $8 billion in equity, leaving roughly $37 billion, plus hundreds of millions in added costs and fees, to be financed.
TPG and KKR, two of the nation's biggest private-equity firms, quickly rounded up a blue-chip consortium of finance partners that includes Citigroup, JPMorgan, Credit Suisse, Goldman Sachs and Lehman Brothers.
According to TXU's latest regulatory filing, on July 20 those parties agreed to a debt commitment letter pledging their support.
"These are really big players. Their reputations are on the line" to pull off the deal, Block said.
And, as Wachovia asked in its note: "Do lenders want to make enemies of KKR and TPG? Probably not."
According to TXU's latest filing, the lenders agreed to provide $37.35 billion in loans under a variety of terms. The lenders' exposure to the ultimate success of the buyout would rise if they were forced to hang on to more of the debt than they initially anticipated. And they are already making equity investments in the deal, a somewhat unusual measure that lets the TPG/KKR group put up less cash.
TXU's filing says JPMorgan Ventures, Citigroup Global Markets and Morgan Stanley & Co. each agreed to put up $500 million in cash toward the $8 billion in equity. Goldman Sachs and its affiliates are in for $1.5 billion, and Lehman Brothers and affiliates are in for $400 million.
"It's difficult but doable," Block said.
TXU BUYOUT HIGHLIGHTS
The offer: On Feb. 26, investors led by Fort Worth-based TPG and Kohlberg Kravis Roberts & Co. offered roughly $45 billion for Dallas-based TXU Corp., the state's largest utility.
The deal: TPG, KKR and other investors pledged to put up $8 billion in cash. Several banks and investment firms committed to $37.35 billion in financing and will finance hundreds of millions more in expenses and fees.
The challenge: Rising interest rates and growing fears about loan defaults have made debt more expensive and harder to arrange than it was when the deal was announced. The lenders might have to take a loss on some of the debt they sell to investors or keep more on their books than they had planned.
Jim Fuquay, 817-390-7552
jfuquay@star-telegram.com
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