TXU Lenders Do The Math

Posted by Keith Hahn, Jul 31, 2007, 9:30am

Funding a $37 billion buyout isn't what it used to be, especially since debt on recent buyouts is losing up to 10% in value, sticking lenders with hefty losses. The lenders led by Citi and including Lehman, JPMorgan, Goldman and Morgan Stanley are considering paying a $1 billion break-up fee so that everyone can quietly walk away.

The proposed KKR, TPG and Goldman PE buyout of TXU calls for $30 billion of term loans and $11 billion in an unsecured bridge loan. Sharing a $1 billion loss is better than sharing a potential $3.7 billion loss (several analysts worked a 120 hour week to compute that). The banks are clever like that, at least in hindsight after offering such huge financing packages for these PE deals.

Thomson Financial reports that there is $300 billion worth of unfunded buyout debt currently threatening numerous impending PE deals like First Data.

Lenders mull pulling out of TXU and pay 1 bln usd break-up fee [Thomson Financial via CNN Money]

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Posted in: Banks, Private Equity, TXU

Comments

Posted by Random Banker, Jul 31, 2007 10:13AM

There's no way the banks are getting out of this that easy, they're going to have to fund the bridge. What banker in his right mind would tell Henry Kravis that his deal is canceled... not only that but they're going to have to do an IPO too... and strip down to their boxers and dance for nickels is Kravis deems it necessary... This is why KKR has been paying all these fees for the last 25 years so that when crunch time rolls around the Bankers bend over and take it. Besides its not the worst bridge in the world the banks'll be able to get it off their book, TXU has plenty of assets and pretty much gets to set prices in ERCOT

Posted by AJ, Jul 31, 2007 10:20AM

Yeah, no way Kravis lets them walk away. Check out his other recent deals. He looooves making the bankers eat their underpriced commitments

Posted by inIT4the$, Jul 31, 2007 10:22AM

Also, this gets much worse for the banks. They have something like 320bln they've committed to.

Posted by inIT4the$, Jul 31, 2007 10:24AM

Bankers won't be hurting here, it's the capital markets guys who'll have to move this stuff. Remember, bankers take no risk, only fees.

Posted by Former Eye-Patch Wearing Joker, Jul 31, 2007 10:26AM

Are you all insane? I think the banks overhand it this time, Kravis needs them too....

Posted by AJ, Jul 31, 2007 10:36AM

Sure KKR still needs them... but being KKR and still paying out fees... the banks will come back to him, no matter what...

Posted by Random Banker, Jul 31, 2007 10:40AM

inIT4the$: That's not quite true the capital markets guys can only sell what they've been given. Who ever is in charge of the portfolio of loans is the one with the problem. And the bankers have plenty of risk too; the risk of being fired once the credit cycle turns and about 1/5th as many leveraged finance professionals are needed.

Former Eye-Patch Wearing Joker: The problem for the the Banks is that they need Kravis MORE than he needs them. If Citi wants to walk away from the KKR relationship Wachovia is only more than happy to stepup and finally crack into the bottom tier of league tables... if not Wachovia then RBS or Barclays or BofA

Posted by , Jul 31, 2007 10:48AM

Random banker, BofA is already the second largest leveraged loan underwriter behind JPM this yr

Posted by Former Eye-Patch Wearing Joker, Jul 31, 2007 10:53AM

Random Banker: I agree, your first passage simply made it sound like you believed KKR was master of the universe (I pictured Jafar in Aladdin) and that there was no sort of give and take relationship. No bank is going to take a client who doesn't bring in profits, if these losses mount, they'll start to walk....

Posted by Random Banker, Jul 31, 2007 11:05AM

Former Eye-Patch Wearing Joker: Well the issue is also with the term "loss" When you get your commitment fee everything is nice and straight forwarded assuming can syndicate everything. You take several hundred million dollars up front and walk with a very small amount of exposure left on your books. However, in the cases that the banks have to hold the bridge. They will STILL get their fee and their cost of holding the bridge for them will be the NPV of the upfront fee plus the interest earned at the cap interest rate on the bridge discounted at the ROI of the firm.

By the time all of that is sorted and it is determined if the deal was a loss or gain for the bank most of the bankers involved in the deal will have moved on and their will be new highly profitable LBOs to be done.

And that is just taking into account the NPV of just this deal they also have to take into NPV of the TOTAL relationship with KKR.... of course bonuses are paid based on the current year's Fees so no one really cares that much about maximizing shareholder value anyway.... at least not at the commercial banks; GS and MS i think still regard their capital as precious

Posted by Former Eye-Patch Wearing Joker, Jul 31, 2007 11:09AM

Agreed now that you're rational and have backed away from accusing banks of dancing for nickels and bending over and taking it, life's not that easy for KKR.

Posted by Random Banker, Jul 31, 2007 11:17AM

End result is the same. Maximize fee's at all costs ie: do what Henry Kravis tell you to

Posted by arbman, Jul 31, 2007 12:21PM

David Faber on CNBC firmly debunked this story. It was written by some joker at AFX in London who was hurrying it out because he didnt want to get scooped and didnt bother doing any basic "fact-checking". He will be hearing it from his editor....

Posted by , Jul 31, 2007 1:07PM

Random Banker; that is if you have never heard of mark-to-market and underwriting baskets.

first there are limits to how much underwriting any bank can do..the more you hold the less deals you can do.

second, the losses are immediate, even if the credits you hold are fundamentally sound, if the bids are at 92 or like some shit i've seen this week at 87...and your fees were 150bps after fully flexing the deal, you r effed

btw, commitment fees are 50bps...and the bridges have caps that are insanely tight so that shit, if funded, will always result in a serious hit.

Posted by Random Banker, Jul 31, 2007 1:24PM

When did commercial banks start marking their loan portfolios to market?

Posted by the red ant, Jul 31, 2007 2:00PM

Isnt the main issue here the banks getting stuffed by the CDOs and HFs who are suddenly no longer buying the loans? Thereby forcing the banks to take much larger positions and redistribute their assets. When you take a step back, the banks are getting played from both sides of the loan.

Posted by Random Banker, Jul 31, 2007 2:23PM

Yeah but that's what the banks get paid to do "syndicate" risk. The reason there is a bridge for the bank to get stuck is because this situation was already foreseen. And the banks will be looking to recoup their cost of capital across all of their KKR/PE deals not just this particular deal or even the deals that happen this year. You have to realize that banks have been getting paid huge fees to hold risk for a month or two until they could off lay it off to the market; some of those profits obviously subsidize any the bridge the bank later has to fund.

Posted by , Jul 31, 2007 2:57PM

random banker..what commerical banks are undewriting these bridges? even at the banks that have the 'balance sheet' these things are booked at corp vehicles and are marked to market as they are not securities to be held to maturity. most of this shit is too close to being tied so they wouldn't book it at a bank anyway. further, a good portion of this fwd calendar is held by MS, GS et al.

Posted by Random Banker, Jul 31, 2007 5:20PM

Anon 2:57: Citi, JPM, BofA, DB, CS, UBS to name a few. ML MS and GS have set up commercial banking subsidiaries so they do not have to mark their loans to market either. No one marks a bridge loan to market... at least not right away they wait until a precipitous market down turn and take large write downs all at once they have one Super shitty quarter no point in marking the bridge to "market" if you're going to take it out with bonds in a month anyway.... I maybe a little off here ... any one on the syndication desk want to chime in? but i'm pretty sure bridges are not marked to market.

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