Tuesday, December 4, 2007

What Buffett’s TXU Play Doesn’t Mean (BRK.A)

From the New York Times DealBook blog:

Don’t count on Warren E. Buffett’s purchase of TXU bonds from Goldman Sachs as a sign of confidence in the high-yield debt market. The Oracle of Omaha himself doesn’t see it that way.

Fortune’s Peter Eavis reported Monday that the billionaire investor’s vehicle, Berkshire Hathaway, has invested $2.1 billion in bonds related to the Texas energy giant’s landmark $45 billion buyout. But in a follow-up report, CNBC said that the value-oriented investor didn’t make the deal because he sees sterling deals in those particular kinds of debt, uncharitably known as junk bonds.

Citing an unnamed source, Mr. Eavis said that Berkshire bought $1.1 billion of bonds with a 10.25 percent coupon at 95 cents on the dollar. Berkshire also bought $1 billion of 10.5 percent bonds known as pay-in-kind toggles for 93 cents on the dollar. Those bonds, known as PIK toggles, are riskier because they can be repaid in cash or by the issuing of new debt.

All told, that’s $2.1 billion out of the approximately $4.5 billion to $5 billion in TXU bonds that banks sold in October. That sale, coupled with $7 billion in loans, marked one of the biggest issues of high-yield debt since the September sale of loans related to First Data’s buyout.

As The New York Times and others reported at the time, TXU’s banks had a fairly easy time selling the deal. They priced the loans at about 99 cents on the dollar and found buyers for the PIK toggles, when those kinds of bonds had all but disappeared from new debt issues....MORE, including three versions of the story.

Market Movers adds:

...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.