KKR and Goldman Crews Asking Buffett to Take a Haircut?

[Guest ValueCarl]

I find this hard to believe when pondering a man who gleefully counts $15 per second payments from those criminal operators at Goldman. Now, I don't know his cost basis or amount of time he's been positioned in this "Junk," but one would think a 30 percent haircut from here, might be less than his cost basis excluding net interest.

 

DOW JONES NEWSWIRES

Energy Future Holdings wants billionaire investor Warren Buffett and other unsecured bondholders to swap debt in a unit, known as TCEH, at a 70% discount of face value for debt that matures later, the New York Post reported on Tuesday.

The Dallas energy giant, formerly known as TXU, has been trying to restructure its $40 billion debt load stemming from its leveraged buyout by KKR & Co. (KKR:$11.1000,$-0.1000,-0.89%) , TPG Capital and Goldman Sachs in 2007. Buffett, who holds $2 billion of EFH bonds, is known to have disdain for private-equity firms.

Last week, Energy Future persuaded some holders to swap $478 million of debt for $336 million of new debt. It is still attempting to get Buffett and other holders to exchange much of the remaining $6 billion of bonds for new bonds worth $4 billion, the Post reported, citing a source.

Full story at http://www.nypost.com/p/news/business/clash_of_the_titans_ g0n7lIAAspjNMLGHfqTxWP#ixzz12LlNeP5N

-Dow Jones Newswires; 212-416-2900

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  (END) Dow Jones Newswires

  10-15-100920ET

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[gfp]

Buffett bought them in 2007:

 

$1.1 Billion of 10.25% bonds at 95 cents on the dollar, effective yield 11.2%

$1 Billion of 10.5% PIK-toggle bonds (interest can be paid in cash or more bonds) at 93 cents, effective yield 11.8%

 

At the time the bonds were hard to sell and they probably couldn't have done the deal without Buffett (Goldman didn't want the bonds itself)

 

[gfp]

I hope he doesn't have to take the haircut, but it shows he still rocks rule #1 - he's received over $681 in income on his 1.975 Billion investment - and the haircut would put him at 70% of the 2.1 B face value, 1.47B.  Not good, but not an absolute loss either.

 

[Guest Bronco]

Wouldn't Buffett be happier if the bonds defaulted and he could go after the assets?  Just food for thought.

[Guest ValueCarl]

Hmm, great work men and/or women. However, the "net after tax" interest on the non PIK bonds and paying tax on 70 percent of principal on the PIK's, makes this a worse situation than identified. Bronco's food for thought is more interesting, since we must assume that "The Oracle" is aware of more "underlying value" from a BK filing instead.

 

This Goldman/Buffett relationship is a most peculiar one to say the least!  :D

[gfp]

ValueCarl, could you help me understand what you mean by: "paying tax on 70% of principal on the PIKs" means?  Thanks

[twacowfca]

I was under the impression that these were unsecured and not particularly valuable in a bankruptcy of this firm.  Buffett would obviously be interested in the utility assets.  I guess that's why these were the only junk bonds he was interested in at the time.

 

These were not without risk at the time of purchase.  I had assumed that WEB knew what he was doing and that the assets behind his standing as an unsecured creditor compensated for that risk if he could control that creditor class.

[CONeal]

I agree with Bronco's thinking on this. 

 

It would be better for the bonds to default and let Mid American roll the company into it's fold.

[Guest Bronco]

I can't honestly speak to the legalities of the bonds defaulting - I do and have believed that BRK wants to massively expand its utility operations.

 

 

[Guest ValueCarl]

I apologize globalfinancepartners. I may have had my thinking mixed up when I quickly digested your earlier post identifying the investment blocks.

 

My thinking was that a "preferred in kind" debt security would resemble a preferred share of common stock, so that, in perfect Buffett form, a percentage of the "dividends" for a corporation would be "excluded" from income tax.

 

Where I think I confused it was, the fact that it's the inverse ratio for such a security assuming I'm right. That is, 70 percent of the dividend payments he is receiving from that tranche is sheltered from tax, while only 30 percent is exposed.

 

I would be happy to be schooled by you, if what I am writing here is wrong excluding further research on my own part.       

[gfp]

Thanks, no apology necessary!  I'm just trying to learn about the investment.  I believe both bonds have payed only cash interest as the PIK-toggle only comes into play in 2012.  So he's payed tax on the interest earned, but would have a tax loss if he took the haircut, right?

 

I agree with everyone that the utility assets are his ultimate downside protection, in that he would be thrilled to "rescue" this valuable company in a restructuring.

 

Here's hoping he gets another chance at Constellation after they extricate themselves from the EDF nuclear mess and (hopefully) successfully exercise their coal plant put.  They might be too healthy then to even want a deal at BRK prices...

 

Thanks again.

[mpauls]

I find it very unlikely that Buffett takes the exchange.

[Zorrofan]

I agree with Bronco's thinking on this. 

 

It would be better for the bonds to default and let Mid American roll the company into it's fold.

 

I like the sound of that better! Anyone have a ball park guess what it would cost for Mid American to swallow this? The private equity firms, if they can't reach a deal, may be willing to unload at a loss instead. That would be ironic - they end up taking the haircut instead of Buffett!

 

cheers

Zorro