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To: ChanceIs who wrote (88189)	7/26/2007 9:25:51 PM
From: ChanceIs	Read Replies (1) \| Respond to of 206367

TXU Leveraged Buyout Another Test For Nervous Debt Markets DOW JONES NEWSWIRES July 26, 2007 1:55 p.m. By Matthew Dalton Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Investors' sudden distaste for more risky debt could significantly complicate financing for the massive private equity buyout of power company TXU Corp. (TXU). Shaky debt markets could also leave the consortium of Wall Street banks that have agreed to finance the $37.4 billion debt portion of the deal holding large loans on their balance sheets. TXU filed its final merger proxy statement on Wednesday, recommending that its shareholders vote to approve the deal at a Sept. 7 meeting in Dallas. But the company also said it was told by KKR and TPG that there is "significant uncertainty as to the various details of the ultimate structure of the debt financing." KKR and TPG have financing commitments from Citigroup (C), Credit Suisse (CS), J.P. Morgan Inc. (JPM), Goldman Sachs Group Inc. (GS), Lehman Brothers and Morgan Stanley (MS). The deal's sponsors, Kohlberg Kravis Roberts & Co. and TPG, formerly Texas Pacific Group, have yet to disclose the exact terms of the debt structure they've lined up from the banks. The current financing arrangement includes a package of senior secured and unsecured term loans amounting to $26.1 billion and a senior unsecured bridge loan of $11.25 billion. Risk-averse investors have been increasingly balking at junk bond offerings meant to replace bridge loans, which are temporary leveraged buyout financing extended by the banks. This has fueled worries that Wall Street banks will find themselves on the hook for risky, longer-term financing. TXU said that it expects a "substantial majority" of the debt issued by TXU for the buyout to be secured by the company's power plants and retail supply business. "With the kind of magnitude they were talking about, a significant portion of that debt probably needed to be securitized," said Denise Furey, a senior director at Fitch Ratings in New York. "And obviously the market's getting tougher." TXU said in its proxy that if the financing isn't available under terms originally negotiated with the banks, KKR and TPG have agreed to use their "reasonable best efforts to arrange alternative financing from alternative sources on terms no less favorable to (KKR and TPG)." KKR and TPG haven't made alternative financing plans, according to the TXU proxy statement. TXU declined to comment, referring all questions to the deal's sponsors. A spokesman for KKR and TPG declined to comment. Spokesman for all the banks involved either declined to comment or didn't return calls seeking comment. Natural Gas Slide Further complicating matters for TXU's buyers and their bankers is a recent downturn in the price of natural gas. Though TXU owns an electric utility, most of its earnings come from power sales into the volatile Texas electricity market, where natural gas sets the price of power. TXU's financial health will be more suspect to debt investors if natural gas doesn't rebound from current levels, analysts say. Natural gas prices have fallen precipitously in recent weeks amid mild weather in the Northeast and Midwest and a lack of hurricane activity. On Thursday, front-month natural gas on the New York Mercantile Exchange was 61% off its record high of $15.378, hit on December 13, 2005, and was down about 12.5% for the month. TXU has hedged some of its exposure to natural gas prices, but plenty of risk remains. The company said in its annual report in March that each $1 per million British thermal unit drop in natural gas prices could lower its pre-tax earnings by $300 million. "Don't forget that TXU isn't really a utility," said one industry banker who isn't participating in the deal. "If natural gas is at $5-$6, TXU's cash flow looks a lot less robust." Number Of Deals Delayed A number of leveraged buyouts have delayed their debt offerings in recent weeks because investors have chafed at the low interest rates and other borrower friendly terms that have prevailed in an era of unprecedented liquidity. If banks can't find investors for the debt, they must keep it on their books, which constrains their ability to finance other deals. "You will see the Street taking on a lot of bridge loans and more aggressive repricing of these things," said JP Morgan's Chief Executive Jamie Dimon on a conference call with investors and analysts last week. Bridge loans are built during the arrangement of a leveraged buyout. Private equity firms choose underwriters or loan syndicating agents who can commit to provide the financing if a company is unable to place its bonds or loans. TXU's bridge loan would be the largest to hit the market so far. Because of the difficulty KKR and TPG will probably have getting that loan refinanced in the current market, "as of now there's a high probability that KKR will draw down on that bridge loan for a significant period of time," said the banker, who spoke on condition of anonymity. This can be an expensive proposition for borrowers. Bridge loans start out charging 7%-8%, close to what the bonds would have priced in the market. But over the first year, rates can rise as high as 13%. TXU has three main business segments. It owns TXU Energy, a retail electricity provider, and Oncor, a regulated electricity transmission and distribution company that delivers much of the power purchased by retail customers of TXU Energy. Most of its earnings, however, come from Luminant Energy, which owns low cost coal and nuclear fueled power plants in Texas. These plants earn large margins because they make electricity cheaply relative to prevailing market prices in Texas, but their commodity exposure risk is substantial. As TXU said in a February presentation announcing the buyout by KKR and TPG: "TXU likely has one of the largest commodity position(s) in North America during a time of extreme volatility in the natural gas market." In its proxy filing this week, TXU highlighted the idea of having TXU Corp. "guarantee" the debt of its subsidiaries Luminant and TXU Energy, which will carry most of the debt of the transaction. The banker who isn't involved in the deal said this probably means that TXU wants to gain the benefit of having the steady dividends produced by Oncor, the regulated business, backing up Luminant and TXU Energy should there be a major meltdown in the Texas electricity markets. But Texas regulators might be wary of this arrangement, as KKR and TPG have previously pledged not to put any new debt on the balance sheet of Oncor. Having Oncor's dividends support Luminant and TXU Energy could tie up those dividends, which regulators might want to see invested back into Oncor's system.

To: ChanceIs who wrote (88189)	7/26/2007 10:30:39 PM
From: ChanceIs	Read Replies (1) \| Respond to of 206367

Banks' Two-Edged Sword Cutting Off Risky Borrowers Could Leave Some Lenders Holding Bag on Bridge Loans >>>Hmmm. I guess that if were more "hip" I would have couched my previous point #1 in terms of the "LBO put." Below is all the more reason to short TXU in the AM.<<< July 27, 2007 Wall Street's risk managers are having a lousy month. Bank stocks have led the recent market rout in large part because investors think lending businesses will be battered by credit-market woes. Normally, to stanch such losses, banks' top cops would stop handing money to their riskier borrowers, like hedge funds and managers of collateralized loan obligations, or CLOs. Many have done just that. But the banks are also getting stuck with huge buyout-related bridge loans. And the main buyers of those loans are -- you guessed it -- hedge funds and CLOs, vehicles that hold pools of sliced-and-diced bank loans. Something similar happened back in 1998. After Long-Term Capital Management nearly went bust, banks cut off credit lines to a host of hedge funds. Deprived of oxygen, many collapsed, sucking money out of the markets and worsening the emerging-markets crisis. But because they are now unable to persuade skittish hedge-fund and CLO managers to buy big buyout-related debt packages, the banks are on the hook. This week alone, they have been stuck with about $20 billion of unwanted loans to Chrysler Group and United Kingdom drugstore chain Alliance Boots. Just a few months ago, CLO managers and hedge funds would have snapped up nearly three-quarters of those loans. Worse, banks have already committed to provide an additional $200 billion-plus of buyout debt. If that ends up on their balance sheets, any further decline in loan prices could slam their bottom lines. Credit Suisse estimates a 10% markdown on the value of those loans would cost banks a third of their 2007 earnings. If they hedge their exposures, it might be less severe. But the cost of hedging leveraged loans has increased about 80% this month -- and some can't be hedged at all. So bank risk managers face a quandary. They can play it by the book and reduce their credit lines to CLOs and hedge funds. That would shield them from some losses. But it could tip the funds over the edge. Who, then, would be left to buy all those risky bridge loans? The 'LBO Put' Vanishes Is it time to say farewell to the "LBO put"? Stock prices have been pumped up by hopes that almost every listed company might be a leveraged-buyout target. That logic suggests the opportunity to sell at a higher price -- much like a "put" option -- will come in the future, even if shares fall today. But tighter credit conditions -- for private-equity firms and companies alike -- could knock this prop away. A tougher credit market has already affected buyouts like Chrysler's. It could yet affect deals that haven't been announced, and with that, stock-market valuations, too. Shares of Intercontinental Hotels, a U.K. hotelier that is a perennial takeover target, fell 7.5% in London yesterday on fears it may no longer be bought. How valuable might the LBO put be? One crude measure is the difference in valuation between smaller firms that are more likely to be bought out versus bigger companies. The Russell Midcap trades at 20 times earnings, a 25% premium to the Dow Jones Industrial Average. Private-equity firms are partly responsible for this discrepancy. That's evident from the increasing number of deals they are doing. In 2000, buyouts accounted for 4% of all transactions, according to Dealogic. This year, they account for a quarter. Yet companies have played a role, too. Easy credit has fueled their appetite for all-cash deals. Seven years ago, all-cash deals accounted for 40% of corporate transactions world-wide. This year, they have accounted for almost 80% -- a proportion too large to be accounted for by private equity alone. In addition, companies have made large acquisitions of their own stock, even as their credit ratings have fallen. If the credit cycle turns, companies will become less keen on such share buybacks. The decision by Expedia to slash its buyback this week could be a harbinger of things to come. That will affect valuations, too.