TXU Debt Floated Into Reviving Market

By Michelle Sierra Laffitte

As the credit window begins showing some daylight for big deals struck earlier this year, the market will get its biggest test yet later this month.

The debt arrangers for the buyout of TXU Corp. started attempting last week to unload some of the $24.5 billion in bank debt required to take the electric utility private. The $45 billion deal, sponsored by Kohlberg Kravis Roberts & Co., TPG and GS Capital Partners, officially closed earlier this month even though none of the debt has moved off the balance sheets of the half-dozen banks that underwrote the credit portion of the deal. The deal was struck in February, when bank and bond arrangers were turning out large, highly levered tranches at a fast clip.

The credit market froze in early July, but the fortunes for the TXU deal look a little brighter than they did just a few weeks ago. Now that big names such as Allison Transmission and First Data have been able to sell loans to investors, TXU is likely to ride their coattails.

The sale began with an investor meeting on Oct. 15 at the Pierre Hotel in New York. This follows the lead of the First Data deal, whose underwriters launched the debt offering at the Pierre and later sold fractions of its $3.1 billion term loan B in a three-tranche formula. This time, TXU is taking it up a notch and starting with at least $7 billion to $8 billion on the first term-loan-B piece, compared with the $5 billion piece that First Data initially brought to market.

In addition, and also following the First Data example, TXU’s loans are expected to price at a discount to par—probably at 97 cents—to make the paper more attractive. Altogether the financing includes a term loan of up to $16.45 billion, a delayed-draw term loan of up to $4.1 billion, a letter-of-credit facility of up to $1.25 billion and a revolver of up to $2.7 billion. Citi is serving as the administrative agent on the TXU transaction. Goldman Sachs, JPMorgan, Lehman Brothers, Morgan Stanley and Credit Suisse are lead arrangers.

Loans under the senior secured portion of the financing are priced at LIBOR plus 350 basis points, a spread that attracted buyers immediately, according to market participants. Lehman Brothers, Citi and Morgan Stanley will also become equity investors in the transaction. Total sponsor equity is $8 billion.

With such big debt pieces on offer, the biggest question is who will surface as buyers. Much fuss has been made about the recent reduction in participation by managers of collateralized loan obligations. But that has left room for nontraditional bank debt buyers such as hedge funds, high-yield investors, sponsor-affiliated funds and equity income funds. Indeed, some LBO shops have raised funds or earmarked existing stockpiles to buy discounted debt, sometimes on deals in which they’re also equity sponsors.

Still, TXU’s syndication is going to have to be pervasive if a dent is to be made in the enormous pile of paper. “They are going to go to the world to do this,” one trader said of the underwriters.

Given that TXU is a robust credit in the steady industry of electric utilities, there is considerable interest. An investor mix of 40 percent high-yield and equity income funds, 40 percent hedge funds and 20 percent typical loan investors is expected to comprise the book. “You are getting a lot of nontraditional investors in bank debt because the yields are sufficiently attractive to them, and on a risk-adjusted basis they think that’s not a bad place to be,” one banker familiar with the deal said.

“It’s a very attractive deal, it’s a utility, well-hedged. … You have no idea how large the orders have been flowing in,” one buyside participant said.

Indeed, just as First Data had lined up $2.5 billion to $3 billion in commitments for a term loan before the deal was sold, TXU’s underwriters are thought to have already lined up at least half of the amount in anchor commitments, specifically from nontraditional investors that are targeting such deals.

“We get a lot of calls from equity funds,” a second banker said. “But, besides First Data, I still haven’t seen them really participate in many transactions. What we are seeing a lot of is these specialty funds set to invest in LBO debt. Those debt funds of TPG, TH Lee—they’re out in full.”

On the back of this interest, CLOs, once the mainstays of syndicates, seem to be re-emerging. “We’re starting to see some signs of life in the CLO space,” a CLO manager said. “It is still early but we have been seeing deals getting priced, dealers working through their warehouse issues. We’re seeing a return to normalcy.”

Michelle Sierra Laffitte covers leveraged lending for IFR, a sister publication of Thomson Financial.