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

Tyler Durden's picture


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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Mon, 04/15/2013 - 20:53 | 3454071 Dr. Engali
Dr. Engali's picture

What is it with these Texas energy companies ? Did Authur Anderson do their books too?

Hey Kenny Boy how's the energy futures market treating you?

Mon, 04/15/2013 - 21:29 | 3454332 NoDebt
NoDebt's picture

What's up with London being the epicenter of so many financial scandals?

How many licks does it take to get to the center of a Tootsie Roll Tootsie Pop?

The world may never know.  But I guarantee somewhere, somebody knows.

Tue, 04/16/2013 - 08:28 | 3455596 TheMerryPrankster
TheMerryPrankster's picture

see "City of London" a distinct and separate entity from London,England.



Mon, 04/15/2013 - 21:47 | 3454444 formadesika3
formadesika3's picture

uh, Kenny's dead.

Tue, 04/16/2013 - 00:48 | 3455076 palmereldritch
palmereldritch's picture

Yeah, but what's the frequency?


Mon, 04/15/2013 - 21:59 | 3454536 LongBalls
LongBalls's picture

TX is deregulated. I love it. I paid $34 on my electric bill last mo. and the banks house that I live in is above average in size.

Mon, 04/15/2013 - 20:53 | 3454089 Jim in MN
Jim in MN's picture


It was more than a bet on natural gas prices.  It was the world's biggest bet that coal would still be king. 


Mon, 04/15/2013 - 21:00 | 3454141 duo
duo's picture

Nat Gas prices have tanked, they have tripled electric rates in TX, and they still can't make money?  Too much leverage, I guess.

Mon, 04/15/2013 - 21:21 | 3454284 tricky75
tricky75's picture

Wholesale/retail electric prices havent tripled in TX. too much leverage, too much fracking... 

Mon, 04/15/2013 - 22:25 | 3454677 Catullus
Catullus's picture

Get your facts straight. It's $4 gas at 10 HR. that's $40/MWh for the energy. In 2008, it was clearing at $230/MWh. Power has fallen 85% in 5 years in Texas.

Mon, 04/15/2013 - 22:28 | 3454701 hoos bin pharteen
hoos bin pharteen's picture

TXU's rates some of the worst in Texas. Retail electicity is largely deregulated, and you can change retail plans on the web in about a minute.

Mon, 04/15/2013 - 21:34 | 3454362 dunce
dunce's picture

All i knew at the time was the stock price got whipsawed and i sold out at a big loss. Now that i know who was behind the deal and what is happening, i do not think it have happened to anyone less deserving of success.

Mon, 04/15/2013 - 21:41 | 3454404 CheapBastard
CheapBastard's picture

<money was flowing freely, bonuses would hit a record>


Says it all.

Mon, 04/15/2013 - 21:36 | 3454374 dunce
dunce's picture

All i knew at the time was the stock price got whipsawed and i sold out at a big loss. Now that i know who was behind the deal and what is happening, i do not think it have happened to anyone less deserving of success.

Mon, 04/15/2013 - 21:40 | 3454400 dunce
dunce's picture

Coal plants have been shutting down rapidly. The PE groups listed, i believe were all obama backers.

Mon, 04/15/2013 - 20:55 | 3454103 rlouis
rlouis's picture

Can't wait to find out how much of their debt CALPERS and CALSTRS are holding.  And at a point of maximum leveraged cynicism, what other public pension funds have invested too.  

Tue, 04/16/2013 - 00:39 | 3455061 eatthebanksters
eatthebanksters's picture

Knowing how stoopid California Communists are, I'd say Calpers and Strs own a buttload.

Mon, 04/15/2013 - 20:56 | 3454112 otto skorzeny
otto skorzeny's picture

nat gas might spike back up yet-it's been en fuego the last month- only commodity holding its own

Mon, 04/15/2013 - 20:55 | 3454114 B2u
B2u's picture

Isn't Bernancke going to bail them out?

Mon, 04/15/2013 - 20:55 | 3454116 Buck Johnson
Buck Johnson's picture

No one learns and it looks like another market implosion is on the way like 2007 but this one is going to be real bad.

Mon, 04/15/2013 - 21:11 | 3454223 tenpanhandle
tenpanhandle's picture

It seems that natural gas is the best thing to get a crisis boiling.

Mon, 04/15/2013 - 21:00 | 3454145 buzzsaw99
buzzsaw99's picture

Whenever KKR buys something I stop shopping there.

Mon, 04/15/2013 - 21:03 | 3454161 SubjectivObject
SubjectivObject's picture

Wait for it.  With good odds:

Goldman first bought it.

Then Goldman sold it.

Then Goldman Shorted it



Mon, 04/15/2013 - 22:20 | 3454657 Catullus
Catullus's picture

Goldman rolled a portion of it

Mon, 04/15/2013 - 21:08 | 3454208 Winston Churchill
Winston Churchill's picture

Ouch.Thats gong to hurt.

Said the camel castrator catching his fingers  between the two bricks.

Mon, 04/15/2013 - 21:12 | 3454234 earleflorida
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ZeroHedge as of 21:00 has 677,200 hits for today... can we make it a 1,000,000 ?

just countin :-))

Mon, 04/15/2013 - 21:57 | 3454522 W74
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Waaakin on uuuuppppp.  Let the Sheeple Shiiiiiinnnnneeee.

Tue, 04/16/2013 - 11:11 | 3456305 earleflorida
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ZeroHedge reads for April 15, 2013

~ 933,000


weigh two go^... Tyler ;-)>

Mon, 04/15/2013 - 21:25 | 3454312 Herdee
Herdee's picture

Goldman knew it was another Enron and would explode from the inside-out.

Tue, 04/16/2013 - 08:20 | 3455576 TheMerryPrankster
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Financial timebombs ticking, ticking, ticking into the future.

Why do the banks hate our freedom? Why do they want to destroy our way of life? Who will stop these economic terrorists/

Cue Ben in the SuperFed outfit, start the intro music and watch him trip over his cape as he goes ass over tea kettle and arrives on stage costume split up the back and his ass held high showing the audience his only good side.

Welcome to this weeks epsiode of "The Oligarchs" brought to you by Fiat Banking and Too Big Fail Inc.

Looting only works until there isn't anymore loot.

Mon, 04/15/2013 - 22:26 | 3454623 Catullus
Catullus's picture

I've been following it for years. A few observations: this one of the worst LBOs in history. It's just a lesson that the sins of 2006-2007 are still being washed away.

This was a bet on $8gas and into 2008, this was a really good bet.

The actual underlying company, TXU, had one of their best years ever. They have very few complaints. They are one of the few innovative companies in the industry.

The CEO at the LBO got paid $250m at deal close. Pissed the Texas PUC off something fierce.

This was $40bn in debt with $19bn that was supposed to be due 2014. Goldman rolled a good portion of that $19bn to 2018 sometime in 2011, so there's money that's willing to chase this crap for the yield.

Mon, 04/15/2013 - 22:17 | 3454644 NeedleDickTheBu...
NeedleDickTheBugFucker's picture

I wonder if Buffett will have to take any meaningful haircut on his $2 billion investment in TXU bonds.  If so, he'll probably just pull something out of the GM playbook and ensure he gets at least 100 cents on the dollar.

Mon, 04/15/2013 - 22:51 | 3454786 buzzsaw99
buzzsaw99's picture

all buffett's investments are guaranteed by the fed AND us govt.

Tue, 04/16/2013 - 00:12 | 3455023 knukles
knukles's picture

Did Goldilocks write the CDS on em' or'd somebody else?

Mon, 04/15/2013 - 23:51 | 3454972 Glass Seagull
Glass Seagull's picture

EFH trading and gen ops employees are some smart cats, many former Enron folks. The industry wants these people, as they know their stuff. 2007 deal was a total abortion, but the operators are valuable. I wish them all the best.

Tue, 04/16/2013 - 00:11 | 3455019 knukles
knukles's picture

At the time I was not the only one who scratched his head and wondered why the fuck these bozos were paying through the nose for a business in a heavily regulated industry.

Coulda taken their ball sacks and tugged on em for a while for alls been worth.

Tue, 04/16/2013 - 01:47 | 3455144 unirealist
unirealist's picture

We can only hope KKR gets burned to a crisp.  It probably won't.  I fear they won't get justice applied to them for what they did to America until after they croak.  They ruined more than one good company, and fly happily above the wreckage of their plundering in private jets, laughing about how clever they are.

Tue, 04/16/2013 - 03:44 | 3455251 willien1derland
willien1derland's picture

$32 BILLION to be CORZINED of the original $45 BILLION --> 71% of the initial deal's 'value" has 'evaporated' - Ohhh pleeeaaaazzzeee Mr. Holder, Attorney General to the Financial Terrorists, let's have an encore of TOO BIG TO PROSECUTE! Time for Bennie & the Feds to break out more COWBELL!!! CTRL+P is all you need <SARCASM OFF/>

Tue, 04/16/2013 - 07:04 | 3455407 Martin T
Martin T's picture

and GS and KKR made at least 553 mio USD in fees in total on the deal...

Tue, 04/16/2013 - 08:51 | 3455646 Iam_Silverman
Iam_Silverman's picture

Well, I've got a view from the inside.  I work for the Luminant Energy portion of EFH.  We just got wind of this last night (our managers had a little bit more heads-up than us).  I have been predicting that they would file in the first quarter of 2013.  I guess I was wrong.  Everyone else that works here at the powerplant thought they would file early 2014 when the next big tranche of debt comes due.  I was suspicious when they sold $200 Million in new debt (who bought that crap?) in order to fully fund the retirement accounts - and then proceeded to buy-out the non-bargaining unit employees retirement (lump sum or new annuities).  They have also been changing up segments of the company in order to move assets from one group to another.  The address on my paycheck changed from the old address on Bryant Street in Dallas to some new address in Cincinnati.  We also got wind of the corporate lawyers submitting a policy clarification request to the NRC about the nuclear plant.  They wanted to know how it would be treated in bankruptcy.  They didn't like the response - it would be shut down until a new owner assumed the license (and responsibilities/liabilities).  Not wanting to lose nearly 28% of their generating capacity in one fell swoop, they moved that asset to another ledger column.  No doubt one that will remain as part of the "good company".


I'll keep y'all updated.

Tue, 04/16/2013 - 09:02 | 3455699 azusgm
azusgm's picture

Any thoughts on how the Martin Lake power plant near Tatum will fare?

Tue, 04/16/2013 - 17:03 | 3458145 Iam_Silverman
Iam_Silverman's picture

One thing to remember about Texas - it's a closed market.  With no (real) interchange ties to an outside grid - any power taken offline must be replaced from within the state.  There really aren't many spinning reserves to fall back on now (with the spring outages in full swing), so in the interest of public comfort you can be assured that any generation ability will be protected in one form or another.  The PUC likes order and stability.


I am waiting to see if the Luminant Connect website (company intranet) has any information when I go in for night shift here in a little bit.

Tue, 04/16/2013 - 11:00 | 3456235 still kicking
still kicking's picture

I used to work in the corporate offices, I left right after that deal closed, there was never any justification for that deal other than Wilder's big payout.  Hopefully the employees all make it through relatively intact.

Tue, 04/16/2013 - 17:05 | 3458148 Iam_Silverman
Iam_Silverman's picture

"there was never any justification for that deal other than Wilder's big payout"

I read his goodbye letter too.  There certainly was a lot of smug self-satisfaction in that letter, wasn't there?  Hope he enjoys all of that free time with his family he was crowing about.

Wed, 04/17/2013 - 17:43 | 3463441 still kicking
still kicking's picture

I believe he just collects paychecks now sitting on Board of Directors for a couple of companies...rough life. 

Mon, 04/29/2013 - 08:28 | 3509467 aaliyah
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