Buffett just bought a huge chunk of TXU debt at a $125 million discount
to face value:
Berkshire bought into two issues by TXU. It purchased $1.1 billion of 10.25%
bonds at 95 cents on the dollar to give Buffett an effective yield of 11.2%.
And Berkshire bought $1 billion of 10.5% PIK-toggle bonds (bonds whose interest
can be paid out in cash or more bonds) for 93 cents on the dollar, producing
an effective yield of 11.8%.
According to a wire story by Matt Fuller which isn’t online, the 10.25% bonds
mature in 2015 and are rated CCC, while the PIK-toggle bonds mature in 2016
but are callable after 2012, which is also the date at which the PIK toggle
is activated. The issuer is not actually TXU but a subsidiary, Texas Competitive
Electric Holdings.
This is really junky debt. This is what S&P
has to say about what a CCC rating means:
An obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor
to meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
The PIK toggle (which stands for "payment in kind") is particularly
toxic, especially on a deal as junky as this one. (My favorite part of the whole
story comes in Matt Fuller’s wire story, where he refers to the first bond as
a "cash-pay tranche". Now that’s what I call a retronym.)
In any case, it’s fascinating to me that Warren Buffett seems perfectly happy
to buy up $2.1 billion of this paper. Maybe he thinks that TXU is too politcally
well-connected to be allowed to default, and he’s making a moral-hazard play.
Or… maybe he’s making a stealth takeover bid for TXU himself, buying up the
senior debt in the expectation that it will default and that he will be able
to convert it into cheap equity.
Update: The stealth-equity theory gets some support.
says CNBC is reporting that Buffett isn’t interested in junk debt generally,
only TXU’s in particular.