TXU Bonds Tumble as Natural Gas Drop Imperils Biggest LBO: Credit Markets
TXU Tumbles as Natural Gas Imperils Biggest LBO: Credit Mark
Derick E. Hingle/Bloomberg
Natural gas for October delivery fell 5.4 cents, or 1.4 percent, to $3.76 per million British thermal units today on the New York Mercantile Exchange.
Natural gas for October delivery fell 5.4 cents, or 1.4 percent, to $3.76 per million British thermal units today on the New York Mercantile Exchange. Photographer: Derick E. Hingle/Bloomberg
Bonds of the former TXU Corp., the largest leveraged buyout in history, are tumbling as a plunge in natural gas prices raises concern the company may have a harder time meeting its debt payments.
Notes of Energy Future Holdings Corp., renamed after KKR & Co. and TPG Capital paid $43.2 billion for the electricity provider in 2007, lost 10.1 percent last month, the largest decline among the 50 biggest issuers of junk-rated corporate debentures in the U.S., according to Bank of America Merrill Lynch data. That followed a 3.66 percent drop in the second half of July.
Investors are speculating the 22 percent decline in natural gas prices in August, the most since July 2008, will curb the Dallas-based company’s revenue. Moody’s Investors Service says Energy Future already faces a “very weak financial profile, untenable capital structure, questionable long-term business plan and material operating headwinds.”
“They live and breathe in a market that prices off of natural gas,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $60 billion in assets, including Energy Future loans. “They just don’t make enough money to service all that debt. At $8 gas they do, at $4 gas, they don’t.”
Natural gas for October delivery rose 3.8 cents, or 1 percent, to $3.80 per million British thermal units at 12:01 p.m. on the New York Mercantile Exchange. Prices for the fuel have dropped about 72 percent since futures reached $13.58 per million British thermal units in July 2008, 17 months after the acquisition was announced. Natural gas prices help determine the price of electricity.
‘Significant’ Maturity
Energy Future’s nearest “significant debt maturity” is 2012, said Lisa Singleton, a spokeswoman. The company has more than $25 billion maturing through 2014, according to data compiled by Bloomberg.
Elsewhere in credit markets, a measure of corporate credit risk in the U.S. fell to the lowest in more than two weeks after reports showed jobless claims fell. In Europe, auto-parts supplier Continental AG started marketing the region’s first high-yield bond in almost a month and Citigroup Inc. will hold a meeting next week with investors to discuss the financing for the acquisition of Tomkins Plc.
The extra yield investors demand to hold company bonds instead of government debt fell 1 basis point to 180 basis points, or 1.8 percentage points, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 3.539 percent, up from 3.476 percent on Aug. 31.
Bondholder Protection
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 1.6 basis point to a mid-price of 107.5 basis points as of 12:34 p.m. in New York, the lowest since Aug. 18, according to index administrator Markit Group Ltd.
The measure fell after initial jobless claims declined by 6,000 to 472,000 in the week ended Aug. 28, in line with the median forecast of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. The number of contracts to purchase U.S. previously owned houses also unexpectedly rose in July, a sign the market may be starting to stabilize after the expiration of a homebuyer tax credit.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 4.1 basis points to 108.3, and the Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings dropped 16.5 basis points to 491, Markit data show.
Samurai Bonds
The indexes typically fall as investor confidence improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Barclays Plc’s banking unit raised 143 billion yen ($1.7 billion) from the biggest sale of Samurai bonds without a government guarantee since Lehman Brothers Holdings Inc. collapsed in 2008.
Barclays Bank Plc sold 57 billion yen of three-year, 1.04 percent bonds priced to yield 55 basis points more than the yen swap rate, and 51 billion yen of five-year, 1.29 percent bonds with a 70 basis-point spread, according to data compiled by Bloomberg. The lender also sold 25 billion yen of three-year floating-rate notes yielding 70 basis points more than the three-month London interbank offered rate for yen, and 10 billion yen of five-year notes with an 85 basis-point spread.
Continental Marketing
HSBC Holdings Plc’s banking unit plans to sell at least 95 billion yen of five-year Samurai bonds as soon as tomorrow, according to a person with knowledge of the transaction. Samurai bonds are yen-denominated notes sold in Japan by overseas borrowers.
In Europe, Continental started marketing the region’s first high-yield bond since Aug. 5. The Hannover-based company is offering 750 million euros ($962 million) of seven-year notes that may be priced to yield less than 8 percent, according to two people with knowledge of the sale.
Citigroup will hold a meeting Sept. 8 at 10 a.m. New York time for the Tomkins financing, said a person familiar with the transaction, who declined to be identified because the talks are private.
Canada Pension Plan Investment Board and Onex Corp. have agreed to buy London-based Tomkins, a maker of auto parts and building materials, for 2.89 billion pounds ($4.5 billion), according to a July 27 statement. They will fund the acquisition with $3 billion of underwritten debt.
Loan Prices
Leveraged loan prices rose by the most yesterday since Aug. 2 with the Standard & Poor’s/LSTA US Leveraged Loan 100 Index increasing 0.09 cent to 89.42 cents on the dollar. Loans have returned 3.97 percent in 2010, based on the index, which tracks the 100 largest dollar-denominated first-lien leveraged loans.
Junk bonds and leveraged loans are rated below Baa3 by Moody’s and lower than BBB- by S&P.
Moody’s rates Energy Future Caa1, while S&P ranks it a step higher at B-. The decline in the price of the bonds contributed to a 1.59 percent loss in debt rated CCC and lower last month, the only group by ranking to lose money, according to Bank of America Merrill Lynch index data.
The company’s $778 million of 11.25 percent toggle pay-in- kind notes due in 2017 fell 20.5 cents last month to trade at 47.75 cents on the dollar on Aug. 31, according to Trace.
‘Heavily Levered’
“The problem with TXU is it’s a very heavily levered company, and at some point, everyone keeps thinking there’s going to have to be some potential restructuring with the debt they have because it’s such a massive amount,” said Sabur Moini, a money manager who oversees $1.7 billion of high-yield debt at Payden & Rygel in Los Angeles. He doesn’t own TXU bonds.
The company has $36.77 billion of long-term debt as of June 30, excluding the company’s Oncor power-line subsidiary, according to an Aug. 2 regulatory filing.
“To address the long-term debt issues that we have, we’ve launched a liability management program that we will continue to seek opportunities to reduce debt and extend maturities,” Energy Future’s Singleton said in a telephone interview.
Energy Future cut $1 billion of debt and pushed out maturities recently after asking investors to swap their securities for new bonds at a loss, according to an Aug. 17 Moody’s report.
Second-Quarter Loss
The company’s second-quarter net loss widened to $426 million from $155 million for the same period last year, according to an Aug. 2 statement. The electricity provider said it had a $93 million non-cash loss related to the reduction in value of contracts that lock in natural gas prices. The contracts are designed to protect the company against fluctuations in natural gas and power prices.
The prospect of utilities switching to gas from coal and hurricanes disrupting production in the Gulf of Mexico is raising speculation prices will rebound, according to Teri Viswanath, director of commodities research at Credit Suisse Securities USA in Houston.
The most active part of the Atlantic hurricane season is from Aug. 20 to about Oct. 20, according to William Gray, who pioneered seasonal forecasts at Colorado State University in Fort Collins.
“We believe some of the original assumptions of the LBO capital structure never envisioned the magnitude and duration of weakness in natural gas prices,” Jim Hempstead, a senior vice president at Moody’s, wrote in an Aug. 18 note. “The longer today’s low-commodity environment and weak economic conditions linger, the higher the probability of default.”
To contact the reporters on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net; Mark Chediak in San Francisco at mchediak@bloomberg.net.
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